Detroit's bankruptcy & the municipal bond market

Dec 4, 2013

The judge’s decision to let the city of Detroit pursue Chapter Nine bankruptcy protection could have an effect on the municipal bond market.

Municipal bonds have long been viewed as one of the safest investments out there. But bond holders may be among the biggest losers in Detroit’s bankruptcy.

Beth Foos is a municipal credit analyst with Morningstar. She says Tuesday’s ruling is a “watershed event” in the municipal bond market.

“With this high profile case, it’s now clear that full recovery on these investments is not a foregone conclusion,” says Foos.

But Foos does not expect Detroit’s bankruptcy will scare investors away from municipal bonds, just make them choosier.

“Investors will reemphasize the importance of understanding what the security of those investments are and the underlining credit quality of those issuers of debt before they make those investments,” says Foos.

The U-S municipal bond market is worth roughly $3.7 trillion dollars.