How Detroit's Bankruptcy Impacts the Muni Market

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Aug. 26 (Bloomberg) -- Blackrock's Peter Hayes discusses the impact of Detroit's bankruptcy on the municipal bond market with Deirdre Bolton on Bloomberg Television's "Money Moves." (Source: Bloomberg)

Affect a more than $3.5 trillion muni bond market.

Peter, so glad to have you with us here on money moves.

Even if the broader market was not affected by detroit, will it set a precedent?

Meaning, will the city be successful in forcing these hair cut on general obligation bondholders?

I think that is the big question.

The timing of when we get that question answered is going to be the real question here.

If we look at california, it took a little over three years for that to emerge from bankruptcy.

Our guests in this situation is the timing might be longer.

It is a big one and may affect a big part of the market.

I think the market is going to question the efficacy of that.

Essentially, there is no difference between the secured and unsecured credit.

Correct that is right.

And typically, the market has thrived on that full faith credit.

And it's about becoming a state, even a novel -- a sovereign nation will do what they can to cut expenses and do what they can do.

In this case, detroit has walked away and they have put the general obligation question on the table.

It may be a few years before we find the answer to that question.

If that happens or not, is detroit a domino?

How many chapter 9's are lurking out there?

A lot of people are saying chicago is in a precarious situation.

But unlike detroit, it is in a position to raise taxes.

We have seen several weeks, many months, really, of outflows, up marginally from long-term municipal funds.

I think investors are saying what could possibly be next?

-- i think investors are saying, what could possibly be next?

On the expense side of the ledger, cities and states have been much more conservative.

And tax collection is out.

Wetherbee from sales tax or income tax.

And housing in town is helping.

But the big problem is pensions.

Chicago had a big pension problem.

We see it in philadelphia.

But the underlying economies of those governments are much different.

They're very diverse from an economic standpoint.

Philadelphia has gone a long way to diversify its economy from health care to higher education.

Pittsburgh had a big pension problem and has gone through great pains to improve their standing and has gotten upgraded.

Much different economies as opposed to detroit.

We do not see it as a domino that will have a wider impact in the municipal market.

Do you think that the detroit bankruptcy decision goes to the supreme court?

You mention the pensions.

It made me think of that.

Not a lot of precedent for chapter 9. i would have a difficult time finding, if it does going to the u.s. supreme court, but that could be an outcome because this is a very important test case.

It has implications not just for detroit's and other cities and their pension systems.

Then you think about the social security system.

It is in much the same straits as some of these pension issues.

We could wind up there.

You have setting your research, getting a lot broader, that you muni yields -- that muni yields are getting into the curve.

What is physically are part of the curve?

The long term yields have gone up more than shorter-term yields.

That is in response to what the fed may or may not be doing.

Most people think that they will begin to scale back their purchases.

It will have the biggest impact in the long end of the curve.

We have created more value.

Investors are getting compensated more now than they were two or three months ago to move out of the yield curves.

You have to take a step back and ask yourself where you're long- term projection for interest rates is.

Clearly, the emotional direction of the market is far higher rates.

It remains to be seen whether the fed will act in september october or november.

That will have an impact on long-term rates.

Maybe even a bit cautious as we move into the fed moving away from quantitative easing.

This text has been automatically generated. It may not be 100% accurate.

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