It may happen faster than we think. Just the threat of possible muni haircuts may well dry up the market for munis, and then the cities have nowhere to go for the funds they need to keep up the huge pensions they owe.
I don’t see a complete muni-bond melt down due to the Detroit situation, let alone a full bond market collapse. Insurers and lenders, many of them foreign, took big risks on Detroit to get better returns. Looks like they lost, but most US cities and towns are not in the same desperate straits as Detroit. There will be losses, and a restructuring of the bond market - but that’s a good thing if it brings discipline and restraint. Lenders and insurers will start looking at political subdivisions with a more critical eye, charging premiums for the profligate, and, one would hope, reigning in the unending desire to spend other people’s money. (Cue Monty Python)Always look on the bright side of life ....