Muni experts say the credit concerns and expectations for Fed's taper have combined to drive outflows from bond funds.
(Read more: Gross: Fed will keep rates low until at least 2016)
"I see it as credit positive in a perverse way," said John Donovan of Drexel Hamilton. "Today is maybe the first step in saying cities and municipalities can go into Chapter 9 bankruptcy and can use a restructuring process to take care of their problems."
It also cleared the way for governments in Michigan to cut pensions if necessary, he added.
Municipal bonds have traded better recently. Donovan said the MMD ratio, which reflects the yield of the 10-year high-grade muni versus the 10-year Treasury, reached 110 percent in September.
"That was due to mutual fund outflows, as a result of both credits" and concerns about tapering, he said
That ratio is now a more normal 96 percent—still cheap historically.
Blake Anderson, muni strategist at Mesirow Financial, said the way the media covers stories like the Detroit bankruptcy also influences market psychology, but the Fed is a big factor.
"The taper fears have tempered the public's appetite for long-duration bonds, and the credit story just adds anxiety," he said.
What else to watch
There is an OPEC meeting in Vienna on Wednesday, which is not expected to result in any change in production, though some members would like to see cutbacks.
Oil prices rose Tuesday after reports of the January opening of TransCanada's Keystone Gulf Coast pipeline, which will move crude from Cushing, Okla., to Port Arthur, Texas. West Texas Intermediate climbed 2.4 percent, to $96.04 a barrel.
Crude supplies in Cushing are at their highest level since July, or 40.6 million barrels as of Nov. 22. In addition to the OPEC meeting, EIA oil and gasoline inventory data come out at 10:30 a.m. ET.
—By CNBC's Patti Domm. Follow here on Twitter