UPDATE 1-Muni market slumps day after Detroit bankruptcy
* Detroit bankruptcy rattles investors
* Fund flows, Chicago downgrade add to concerns
* Longer dated AAA yields rise 5 to 9 basis points
(Updates market activity)
NEW YORK, July 19 (Reuters) - The U.S. municipal bonds fell sharply on Friday, a day after Detroit filed for the largest municipal bankruptcy in history, adding to investors' woes in the $3.7 trillion market.
News of Detroit filing for creditor protections under municipal bankruptcy came late on Thursday, setting the stage for a costly court battle with creditors and opening a new chapter in the long struggle to revive the city that was the cradle of the American auto industry.
Although expected for months, the news hit an already shaky market. Flows into municipal bond funds have been steadily negative for most of the last five months and recorded the biggest weekly outflows ever in June.
On Wednesday, Moody's Investors Service slashed its credit rating for Chicago, the third-largest U.S. city, by three notches to A3, citing concerns about growing pension liabilities, a problem faced by thousands of municipalities across the country.
"Detroit is bleeding through into the general market right now," said Domenic Vonella, an analyst at Municipal Market Data, a unit of Thomson Reuters. "This is the icing on the cake."
Yields on longer-dated triple-A maturities ranging from 2037 to 2043 rose by 5 to 9 basis points, according to a preliminary read on the MMD triple-A scale.
Vonella said that usual summer reinvestment flows into the muni market had been largely absent due to uncertainty over how and when the Federal Reserve would start reining in its bond-buying program that it introduced after the financial crisis.
On June 24, amid worries about rising interest rates, top-rated municipal bond also took a hit, with yields on both the 10- and the 30-year maturities going up as much as 17 basis points in a single session. Prices move inversely to yields.
(Reporting by Edward Krudy; Editing by Chizu Nomiyama, Tiziana Barghini and James Dalgleish)