Detroit Bankruptcy on Munis

Friday’s big news in the markets (outside of the concerns over MSFT and GOOG) was the bankruptcy of the City of Detroit.

This Chapter 9 filing was a long time coming, in my opinion, and should not be a surprise. But some investors might be wondering–will the effects  spill over to the municipal bond sector overall?

In a word, no.

Detroit is a very unique situation (and not in a good sense). It has very little tax revenues, infrastructure is depleted, and its population is near-poverty level. That’s a toxic mix for any municipality.

But it does underscore the importance of due diligence. Investors who own muni bonds must be very selective:

1. pay attention to credit rating

2. think about the macro and micro–economic factors around the country

3. look up the local economy–is business booming? What’s the tax revenue outlook?

4. consider the overall debt load of the municipality

If those are a bit more work than you bargained for, consider a muni bond fund if you’re looking for current income and capital preservation. Some decent ones include SWNTX (Schwab Tax-Free Bond Fund) and PRINX (T. Rowe Price Summit Municipal Income Fund).

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