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August 20, 2013 11:45 pm
The public school system of the city of Detroit tested the choppy waters of the US municipal bond market with a $92m bond sale on Tuesday, in Michigan’s largest debt offering since Detroit’s bankruptcy last month.
The bonds are backed by state aid payments and proceeds on the sale will help cover operating expenses for the 2013-14 school year. Investors lined up to buy the securities, according to people familiar with the sale. Still, they demanded incentives to participate in the offering.
Michigan’s Finance Authority offered the one-year notes at a preliminary yield of 4.375 per cent. That is more than three times the yield offered by Detroit Schools in May 2012, when it sold $134.6m in one-year debt at 1.25 per cent, according to data compiled by Bloomberg News and Ipreo.
Analysts said that while the municipal bond market was showing signs of stabilising after Detroit’s bankruptcy, investors were demanding higher premiums to hold debt sold by issuers from Michigan.
Munis have been under pressure in recent months because of the looming end of the Federal Reserve’s quantitative easing programme, which triggered hefty outflows from funds investing in the securities.
The sell-off accelerated in the wake of Detroit’s bankruptcy. As prices fell, average yields on long-term munis traded at 4.4 per cent at the start of this week.
This month two other municipal issuers in Michigan postponed debt offerings in the aftermath of the city’s bankruptcy filing.
Battle Creek, a city about 120 miles west of Detroit, delayed a planned sale of $16m in general obligation bonds on August 14. Genesee County postponed a $54.2m bond offer scheduled for August 1.
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