Municipal bond markets suffered their worst losses since the turn of the century as the markets responded to fallout in Detroit over the past two months. Ordinarily, the late summer months are a time when these funds tend to pick up steam, but as Detroit considers cutting its general-obligation bonds, the market has become increasingly wary of these “safe” bonds and is opting to stay away. As a result, most analysts are predicting a prolonged muni bond slump despite a number of positive indicators, as Bloomberg reports:
Benchmark yields are the highest since 2011 and exceed those on Treasuries and AAA company debt by the most in at least 20 months, data compiled by Bloomberg show. In 2011 and 2012, munis rallied when valuations reached current levels. Yet this year’s outsized losses suggest a rebound may not materialize in coming months after Detroit’s Chapter 9 filing helped propel the longest span of withdrawals from muni funds in two years, said Chris Alwine, head of munis at Vanguard Group Inc.“We don’t have expectations of a rapid snapback,” said Alwine, whose Valley Forge, Pennsylvania-based company oversees about $125 billion in munis. “The technical conditions and the cloud of Detroit are overwhelming” the market.
Detroit’s bankruptcy is obviously tragic for many of the pensioners and investors with a stake in the city’s finances, but the key question for the rest of the country has always been whether Detroit’s troubles would ripple through the bond market and hit other cities. This is no small matter, as many other cash-strapped municipalities rely heavily on general-obligation bonds to borrow money at a relatively low interest rate. Detroit’s bankruptcy, along with other factors, appears to have touched off a broad rejection of municipal bonds for the time being. That will make it harder for other cities to keep their budgets under control.[Detroit image courtesy of Shutterstock]