When Detroit filed for bankruptcy two weeks ago, Wall Street asked the obvious question — how can we make money off this?
That didn’t take long to answer.
CNNMoney is reporting that the Detroit municipal bond has become “the hottest trade on Wall Street.”
Though it may seem hard to believe, many hedge funds are betting that Detroit’s bonds — which are backed by insurance firms that could continue to pay bondholders for now — will be quite lucrative in the long run.
There aren’t even enough bonds to go around, with hedge funds are sitting on a long waiting list.
Shortly after Detroit filed for bankruptcy, several hedge funds managed to buy $5 million of pension bonds for 41 cents on the dollar. Those were some of the only pension obligation bonds available.
Hedge funds are also eyeing about $1 billion in general obligation bonds backed by Detroit. More of these have changed hands, but also in small increments. One hedge fund manager said he was able to procure $30,000 of general obligation bonds at 75 cents on the dollar from a dentist in Milwaukee. The fund was hoping to buy several millions of dollars’ worth, but so far, that’s all they can get their hands on.
It’s a risky bet, but one expert told CNNMoney that bondholders tend to recover more in municipal bankruptcies than corporate ones.
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