US states and cities to test muni demand US state and city governments are testing the choppy waters of the municipal bond market this week, trying to raise up to $5bn in funds amid higher borrowing costs in the aftermath of the largest bankruptcy in the US history. The states of Connecticut and Maryland, and the City of New York are some of the issuers proceeding with scheduled sales of general obligation bonds in the coming days as the $3.7tn market for tax-exempt securities reels from Detroit's bankruptcy filing last Thursday. Munis have already been under pressure in recent weeks 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 past couple of days, however, when in addition to the Detroit news, Chicago's ratings were downgraded by three notches to A3 by Moody's. As prices fell, average yields on long-term munis rose to two-year highs at 4.15 per cent, according to Thomson Reuters MMD. To lure investors back into the securities, states may have to offer price concessions and higher coupons, analysts said. "There's still appetite out there for all sorts of muni debt, coming from states other than Michigan," said Adrian Miller, director of fixed-income strategy at GMP Securities. But while most are convinced Detroit's problems are very specific and we are not likely to see a generalised wave of bankruptcies, investors are going to get price concessions and higher yields in order to jump into those muni bonds right now. This week's muni offerings also include sales by redevelopment housing authorities, school districts as well as sewer and drainage systems. Most of the offerings are slated for Wednesday, when Connecticut, Maryland and the City of New York are expected to sell a combined $800m in general obligations. Local governments across the US are also facing potential reviews of their credit ratings and higher funding costs if the proposed treatment of general obligation bonds in Detroit is endorsed by a bankruptcy judge. Fitch, the rating agency, on Tuesday outlined its view on the precedent-setting bankruptcy. Treating GO bonds as unsecured creditors on a par with employees and pensioners "is at odds with Fitch Ratings" prior expectations," analyst Amy Laskey said. If it is confirmed in bankruptcy, it will lead the agency to rethink the distinctions made between tax-supported ratings within Michigan and perhaps nationally.