Abnormal Weather Shocks and US State Level Municipal Bond Returns

This paper investigates how abnormal weather shocks influence U.S. state-level municipal bond returns, offering evidence on the pricing of climate risk in local public debt markets. Using a composite index of standardized weather anomalies and a panel local projections framework, we find delayed but persistent negative effects of abnormal weather shocks on municipal bond returns. Returns remain stable initially but decline by about 35 basis points after four to six months and by 40 basis points after one year, indicating gradual repricing as fiscal and credit conditions adjust. Furthermore, we document partisan asymmetries: bonds issued by Republican-led states exhibit sharper short-term declines, reflecting weaker climate policies and adaptation efforts. Over the medium term, the effects converge across states, suggesting that abnormal weather shocks ultimately impose real and widespread fiscal costs on municipalities, regardless of political orientation.