Any time a negative headline hits a particular asset class, investors can often throw away the champagne with the cork – meaning, they sometimes treat the good and the bad in the same manner…regardless of the underlying fundamentals. With Detroit’s bankruptcy, municipal bond investors are at risk of throwing a lot of champagne away because of just a few corks. In my last blog post, I looked at what the fallout might be for Detroit in particular. This time, I’d like to examine what Detroit’s implications are for the wider muni market, and how to separate the champagne from the corks.
There’s some differentiation that can be seen in impacts for municipal issuers. For larger, higher-rated issuers who are disciplined market participants, there should be relatively minimal market impact. Remember, Detroit is an outlier and doesn’t represent the situation of the largest possible majority of creditworthy issuers. It’s just that most municipalities stay out of the newspapers because they’re able to keep their fiscal houses in order. Read more