We show that pollution increases municipal bonds’ offering yields and yield spreads, indicating increased risk. We establish this using a difference-indifferences design comparing the bonds from the U.S. counties revealed to contain per- and poly-fluoroalkyl substances (PFAS) in their drinking-water supplies with the bonds from neighboring, unpolluted, same-state counties. The increase was more for riskier bonds characterized by repayment obligation, ex-ante debt burden, credit rating, maturity, and bankruptcy access. The resulting pollution-related investment needs and a reduction in public employment and expenditure likely underlie the risk. An instrumental variable-like method utilizing airports as potential PFAS source reaffirms the causal interpretation.​

JEL Classification: G14, H72, H74, Q53, Q58.

Keywords: Municipal Bonds, DrinkingWater Pollution, PFAS, Forever Chemicals.​