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U.S. Bankruptcy Judge Steven Rhodes ruled today that Detroit can remain under bankruptcy court protection, where it’s shielded from lawsuits and other actions that might interfere with its attempts to reduce debt and cut employee benefits.
The decision comes after a two-week trial to determine the city’s eligibility to continue enjoying the protections of Chapter 9 of the U.S. Bankruptcy Code, which deals with cases filed by municipalities.
Detroit filed for bankruptcy on July 18 in what became the largest U.S. municipal bankruptcy in history, saying it didn’t have the money to pay bondholders, retirees and employees everything it owes them while still providing basic city services.
“We have here a judicial finding that this once proud and prosperous city cannot pay its debts,” Rhodes said today. Detroit “has the opportunity for a fresh start,” he said in a decision that was almost immediately challenged by a city union.
With Rhodes’s ruling, the city can now focus on writing a plan to cut the debt. That will mean spending time in court fighting with creditors and time in confidential mediation talking to them, said Dale Ginter, a bankruptcy lawyer who is not involved in the case.
Rhodes also said that the city could cut pensions as part of the restructuring, despite the argument that Michigan’s constitution protects them from being slashed. However, Rhodes warned he will not rubber-stamp any pension cuts.
Bloomberg: – Illinois lawmakers confront historic burden of pension futility. – When Illinois lawmakers report to the capital in Springfield today for another attempt at fixing the nation’s worst-funded state pension system, the gathering will have a ring of familiarity.
Bloomberg: – Munis face unprecedented 2-year drop, Morgan Stanley says. – Investors in the $3.7 trillion municipal market will probably face negative returns in 2014 following declines this year, the first back-to-back annual losses since at least the 1980s, according to Morgan Stanley.
Kiplinger: – Best deals in bonds. – Municipal bonds remain one of the most attractive fixed-income sectors.
Bloomberg: – Ex-GE bankers win reversal of convictions for bid-rigging. – Three former General Electric Co. (GE) bankers won an appeal of their convictions for defrauding cities and the federal government in a bid-rigging scheme involving municipal bonds.
Focus on Funds: – Build America bonds? sure, but not versus other munis. – Build America Bonds – remember those? — have an unusual feature. There’s no new supply. There hasn’t been a new issuance of BABs since 2010, when these bonds’ federal subsidy expired. If you guessed that might pose a dilemma for exchange-traded fund investors, that’s right. As the weekend’s Barron’s ETF Focus column explains, eventually BABs’ liquidity will be poor enough that exchange-traded fund managers will need to broaden their funds’ mandates to include other types of bonds — or simply shut down.
Bloomberg: – Airlines climb in relative value with new American. – Municipal debt backed by American Airlines’ parent has gained more than 500 percent in two years, rewarding investors who withstood AMR Corp. bankruptcy filing and a failed suit to block a merger that would create the world’s biggest carrier.
Learn Bonds: – Improve your memory to improve your returns. – What Rocky and Bullwinkle and your wifes cooking have to do with investing.
ZeroHedge: – Auction system failure forces U.S. Treasury to postpone 3, 6-month bill auctions. – While nobody is impressed by breaking equity and options markets anymore, since this has become a virtually daily occurrence and the habituation level is high, bond markets, and especially the US government’s “guaranteed” bond issuance machinery, are a different matter altogether. Which is why any time something out of the ordinary happens, people pay attention. Such as what happened moments ago when the U.S. Treasury announced that it would delay the closing of the 3 and 6 month Bill auctions, originally scheduled to close today, to tomorrow.
FXStreet: – Is the Fed increasingly monetizing government debt? – Fed Chair Bernanke vehemently denies Fed “monetizes the debt,” but our research shows the Fed may be increasingly doing so. We explain why and what the implications may be for the dollar, gold and currencies.
WSJ: – Corporate bond sales push further into record territory. – A flurry of highly rated U.S. corporate bond sales is pushing bond issuance further into record territory. Microsoft Corp. is selling $3.25 billion on Tuesday and Johnson & Johnson completed a $3.5 billion deal on Monday. Monday’s sales brought 2013 investment-grade debt issuance in the U.S. to more than $1.061 trillion, which is about $8 billion more than last year’s record, according to Dealogic.
Income Investing: – Junk bonds up 0.47% in Nov, 6.83% in 2013. – Junk bonds continued to chug along at their coupon-clipping 2013 pace, gaining 0.47% during the month of November, according to a benchmark Bank of America Merrill Lynch index. That brings year-to-date returns to 6.83%, during a year that the market began with a 6.1% average coupon.
Bloomberg: – Morgan Stanley adds junk-debt analyst Corsair from shrinking UBS. – Morgan Stanley (MS) hired high-yield debt analyst Todd Corsair from UBS AG as the fourth-largest underwriter of U.S. corporate bonds bolsters its position and the Swiss firm reduces the size of its investment bank.
FT Adviser: – Investec AM’s Aird allays fears over EMD fund. – David Aird has dismissed any worries about the capabilities of the Investec Emerging Markets Local Currency Debt fund, after it nearly halved in size in the past six months.
About.com: – Keep an eye on this new bond ETF. – This has been a busy year for bond ETF launches, and the trend continued on Friday with the introduction of the ProShares Short Term USD Emerging Markets Bond ETF (EMSH). While there were already 15 emerging market bond ETFs in existence, EMSH is the first dedicated exclusively to short-term bonds. This fund has a number of potential selling points for investors.
NASDAQ: – How to survive the next “taper tantrum”. – Recent U.S. economic releases have been mixed but the latest jobs report, coupled with improving survey data in both the manufacturing and service sectors, has many believing that tapering in late 2013 or early 2014 may be in the offing. We do not believe a reduction in asset purchases is imminent but we would expect a scaling back of asset purchases in 2014 as economic conditions improve. Higher interest rate sensitive assets might not fall to the extent they did in the summer of 2013, but the episode may provide a framework on how different assets may perform.
WSJ: – Bond investors aim to break index chains. – As the bond market falters, investors are seeking shelter in funds that aren’t tied to indexes. These bonds funds are known as “unconstrained,” “go-anywhere,” “absolute return” or “flexible” funds, and they are gaining in popularity on both sides of the Atlantic as investors anticipate the Federal Reserve reducing, or tapering, its bond-purchase program.
Income Investing: – Unconstrained bond fund inflows up 30% from 2012. – If you believe interest rates are going to rise further, these funds can help dodge some of the interest-rate risk inherent in core bond funds. But if you’re investing in an unconstrained fund make sure you look under the hood, because they can look completely different from one another and can ramp up credit risk and other risks to boost returns.
Business Insider: – Investors are hedging too much against a December taper. – The consensus on Wall Street still appears to be that the Federal Open Market Committee will refrain from announcing the first tapering of the Federal Reserve’s quantitative easing program until its March policy meeting.
Bloomberg: – Gross’s bond fund had redemptions of $3.7 billion in November. – Bill Gross’s Pimco Total Return Fund (PTTRX), which lost its title as the world’s largest mutual fund in October, had its seventh straight month of withdrawals in November as investors continued to flee bonds.
Smarter Investor: – 4 retirement strategies to avoid now. – Retirement planning is filled with conflicting advice. This leads to both fear and confusion for current retirees and those approaching retirement. Questions arise, such as “How should I set up my assets to grow now and in the future?
Gross: An investor can replicate the 3.9% yield of a 30 yr Treas with a 400% position in 3 yr Treas with a stand pat Fed. Take the latter.
— PIMCO (@PIMCO) December 3, 2013
#DETROIT JUDGE SAYS U.S. LAW MAY ALLOW PENSION CUT IN BANKRUPTCY
— Brian Chappatta (@BChappatta) December 3, 2013
It's hard to overstate how important Federal Bankruptcy Judge Rhodes' ruling on ability to cut pensions in bankruptcy process #muniland
— Cate Long (@cate_long) December 3, 2013