Oh, Snap. Orr says, "How about I give you dimes for dollars, and we can call it even?

[corktownyuppie]

3/31/13 Oppenheimer Rochester Limited Term Mutual Fund

Detroiit MI General Obligation 5% 2018. The fund owns $2,000,000 face value with a market value on 3/31/13 of $2,001,480.

The largest discount on Detroit GO bonds is 5.375% 2017 which has a face value of $1,535,000 and a 3/31/13 value of $1,477,729.

They hold twenty-two different DWSD bonds all of which trade at significant premiums to their face value.

Aha. Your surface analysis is correct, but your conclusion is inaccurate.

Yes, you are right that Detroit GO bonds are priced near face value. But that is not an indicator of the market's confidence in those bonds. In fact -- because of the large coupons associated with those bonds -- it is actually an indicator of the increased likelihood of default.

And that was on 3/31/2013. I'm sure those bonds are priced for even less now.

What do I mean?

A tax-free muni with a 5.375% coupon has an equivalent yield to an investment with a 7% taxable rate.

Now look at the maturity date. 2017. You're talking about a bond that is coming due in 4 years. Do you know any AAA rated investments that will pay 7% guaranteed on a 4-year maturity? In comparison, Chase Bank had a 1.01% CD that was 10 years in maturity.

So what I'm saying is that if people were very confident in that Michigan bond, it wouldn't be priced at par. It would be priced at approx 120. And, remember, that was in March, before Orr started really talking about the settlement figures.

There's no way Detroit GO bonds are going to be made whole in all of this. At this point, I think if they get 30-40 cents on the dollar, they will be thrilled.

Detroit Water/Sewer is a separate story. For now.

[mwilbert]

I agree with you that the current bond price isn't a vote of confidence, but it is more of a vote of confidence than I would have expected. If Detroit GOs due in 2017 are paying a 2% spread over an AA muni, by the time of maturity you aren't going to get 10% more than you would in the AA, but [[by your reckoning) they are going to take a 50-60% haircut.

If you believed that was going to happen, you would be an idiot to hold those bonds, assuming that they actually trade.

[corktownyuppie]

I agree with you that the current bond price isn't a vote of confidence, but it is more of a vote of confidence than I would have expected. If Detroit GOs due in 2017 are paying a 2% spread over an AA muni, by the time of maturity you aren't going to get 10% more than you would in the AA, but [[by your reckoning) they are going to take a 50-60% haircut.

But that's what I'm saying. They're not paying a 2% spread over a AA muni. A 5-year AAA muni is 1.19 right now. [[http://www.bondsonline.com/Todays_Ma...elds_table.php) The Detroit 4-yr muni yielding 5%, which puts the spread at 3.8% and putting the Detroit bond at 4x the yield.

The Detroit bond is yielding 4x a well rated AAA muni. There's a lot of ways to interpret this...Detroit's bond is 4x as risky as the AAA bond...or Detroit's bond is almost sure to lose 75% of its yield to maturity through haircuts, etc.

The one thing you cannot interpret is that there is confidence in Detroit's GO bonds. And remember, the prices on these GO bonds were from 3/31. I'm curious what the street value was the day after Orr announced that they were going to ask for 10 cents on the dollar!