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Over 30 years of investing in individual stocks. Extensive business experience with small to mid-size companies, including as CEO. Many hundreds of blog posts on financial and economic matters since 2008. Focus on value with catalysts for upside price action. Background as a physician and... More
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  • What Detroit Might Mean For The Muni Market 1 comment
    Jul 19, 2013 7:38 AM

    With the sad realization that one of the cities that helped create "the machine that changed the world" has been reduced to filing a bankruptcy petition, I am moved to reflect on Seeking Alpha on what this may mean for prices of debt securities of other municipalities.

    This could be a classic "buy the news" opportunities. Bonds have been hammered the past few months, munis badly. Bargains relative to Treasuries now abound. Yesterday I purchased at the offer price a modest amount of non-callable 2029 maturity Tampa sewer bonds rated 'AA'. After Fidelity's commission, the yield to maturity was 4.3%. What does a taxable 16-year T-bond yield?

    It appears that secured Detroit bondholders are likely to receive 100 cents on the dollar. I know that Tampa is sinking, but I'm willing to bet that it stays enough above sea level for those bonds to pay off. Even if inflation is 3% on average, this bond may be a decent deal. I paid $119, whereas it traded over $130 not all that long ago.

    Just a guess- good-quality revenue bonds, and G.O.'s of well-thought of municipalities- may come back into favor sooner rather than later. Just as Enron and WorldCom were not representative of most companies, Detroit is not representative of most of America.

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  • NYer1
    , contributor
    Comments (2804) | Send Message
    Well written indeed.
    The current bargains that abountd in the Muni arena are VERY attractive by historical measures.
    BTW, even Detroit bonds present a very good opportunity if one does his homework well and buys secured debt or the better insured debt (rated AA-).
    The exodus en masse by some of the retail investors caused by the headline risk and the Detroit story prominence in the news has also created a wonderful opportunity within the Muni Closed End fund arena, where well managed national funds can get you 7% yields at some 10% DISCOUNTS to their NAV (more than twice the average discount for the past 5 years and around 6-7 times the average discount for the past 3 years) !!
    When tax free muni's give you well above what comparable taxable treasuries give you, it has been a very good time to buy along history.
    Can they get cheaper? yes, they can, it is tough to call a bottom but at current yields one is well paid for the wait for the market to revert to the long term mean.
    23 Jul 2013, 08:10 AM Reply Like
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