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What Detroit Might Mean For The Muni Market

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.