Oil Price Shocks and Municipal Bond Yields: Evidence from Texas Counties

Abstract

This paper examines whether oil price fluctuations affect municipal borrowing costs for Texas counties with greater exposure to oil and gas production. Texas provides a unique setting for this analysis due to the substantial level of variation in oil dependence across its counties and its state-wide regulatory structure. Using a panel of 101,950 municipal bonds issued between 2005 and 2025, I interact monthly changes in WTI crude oil prices with a predetermined measure of county-level oil endowment calculated as the cumulative equivalent oil production between 1993 and 2000. The results indicate a statistically significant negative relationship of about an 8 basis point decrease in yield with a one dollar increase in monthly oil prices for each additional billion barrels of oil equivalent of county production. This effect persists when considering alternative oil price measurements, controls for local economic conditions, and the exclusion of crisis periods. The findings connect literature on commodity price shocks and local economic conditions to municipal bond markets, suggesting that investors incorporate sector-specific fiscal risk into pricing of local government debt.