Last Week of 2012 to End with Paltry Issuance

The tradition of extremely low issuance for the week between Christmas and New Year's continues this December as the municipal bond market should see paltry activity next week.

Digging into the numbers for next week's primary market, only $2 million is expected to come to market, down from this week's revised $3.14 billion.

All $2 million of new issuance will come in the competitive market, down from this week's revised $879 million in competitive offerings. No negotiated deals are expected next week, and that is down significantly from this week's revised $2.26 billion in negotiated deals.

And while next week is expected to be dead, the following week might see more activity due to recent issuers who have delayed pricing until market conditions improve.

"A lot of deals are getting shoved into the following week of Dec. 31," said Dan Heckman, senior fixed income strategist, at US Bank Wealth Management. "That Monday could be a heavy issuance day as deals get done prior to year-end."

Indeed, at least four deals over $100 million that were delayed this week could price within the next couple weeks or early 2013, including MTA's Triborough Bridge and Tunnel Authority, Massachusetts SIFMA index bonds, and Oklahoma Municipal Power Authority bonds.

And while issuance is paltry for the last week of the year, municipal bond performance is expected to end the year on a low note as well. "Right now we're looking at December being one of the worst months for muni bond performance due to a number of different factors," Heckman said. "There is not just the fiscal cliff and possible taxation of muni interest, but a court case between San Bernardino and the California Public Employees Retirement System. People are also taking profits in positions because we've had such a fantastic run and performance in 2012."

The selloff in December makes for an interesting January, Heckman said, especially this year with many of the tax uncertainties. "You could see the muni bond market be very volatile in January depending on how these tax issues go. If tax rates go higher, January will see strong performance as investors rush in to buy tax-exempt securities and capture higher yields that are now in the marketplace."

If there is a limitation of tax-exemption, the market could see another selloff.

For now, Heckman says the market has corrected itself and muni-to-Treasury ratios are back near or above 100%. "Relative values are improving and we think if some of these issues get resolved in a positive way for the muni market then certainly we believe we might see a better month in January."

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