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What Detroit Might Mean For The Muni Market

Jul. 19, 2013 7:38 AM ET1 Comment
DoctoRx profile picture
DoctoRx's Blog
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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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