The Cyclical Behavior of Risk Spreads On New Municipal Issues.

The article reports on the cyclical relationships in the municipal market through empirical research of the determinants of the relative yield spread RYS. RYS is equal to the absolute difference between a bond's yield and a bond yield index, divided by the bond yield index. Municipal risk spreads can vary over a business cycle because the risk of default of agencies can rise depending on business conditions, investor risk aversion can vary, and the behavior of financial institutions in the municipal market varies.