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NEW YORK (Reuters) - Uncertainty over Detroit's bankruptcy filing kept U.S. municipal bonds investors cautious on Monday after a selloff last week drove yields on long-dated bonds to their highest level in almost two years.
A federal court judge set the first hearing in Detroit's bankruptcy case for Wednesday to take up the city's request to put state lawsuits challenging the bankruptcy filing on hold. Detroit became the largest U.S. city to file for bankruptcy late on Thursday, helping to drive a market selloff the next day.
"You still have this uncertainty about any kind of a reaction that you'll see from retail (investors)", said Randy Smolik, an analyst at Municipal Market Data. "We have seen persistent weeks of some pretty sizable outflows from muni bond funds and now there is a suspicion that will continue, partly due to the Detroit publicity."
Yields on 10-year AAA-rated bonds were steady at 2.67 percent and yields on top-rated 30-year bonds ended up 1 basis points at 4.15 percent, according to MMD, a unit of Thomson Reuters.
Smolik noted that the failure of municipal bond prices to keep pace with Treasuries has made munis relatively more attractive and could offer investors an attractive entry point.
"The adjustment that occurred late last week have put the market in a very attractive place relative to Treasuries," he said. "If we do not see any severe shakeup of the Treasury market in here, there are plenty of reasons for professional buyers to support the deals this week."
Detroit decision to file for bankruptcy helped drive yields on 30-year AAA bonds to 4.14 percent Friday, the highest since August 2, 2011.
Analysts cited five months of nearly continuous weekly outflows from muni bond funds and Moody's triple-notch downgrade of Chicago, the nation's third-largest city, as other factors driving the selloff.
Detroit's general obligation bonds did not trade in significant quantities on Monday. There were some larger trades in revenue bonds secured against water and sewage operations.
Those bonds, maturing in 2039, traded at 92 cents on the dollar, suggesting investors were not expecting them to dragged into the bankruptcy.
(Reporting by Edward Krudy; editing by Chizu Nomiyama, Tiziana Barghini and Dan Grebler)