Final volume numbers for January show a $3 billion increase over the preliminary numbers reported last week, for a total of $19.4 billion.

In the last five years, only 2008 and 2006 have seen less than $20 billion of primary market volume in the first month of the year.

The January volume came from 668 total transactions this year, and represented a 37.7% decrease from last January, when 853 transactions sold for a total of $31.2 billion.

Analysts said last month saw a dramatic repricing of risk, which threw many deals into limbo and kept many other borrowers on the sidelines. The shifting credit views were led by issues relating to the uncertain triple-A ratings of bond insurers and questionable finances at many issuers beginning to feel the pinch of a slowing economy.

In addition, significant losses at many of Wall Street's largest banks, muni hedge funds, and arbitrage accounts kept many institutional buyers from entering the market.

"There's no doubt that banks were very important as an institutional buyer base," Robert Smith, president and chief investment officer at Sage Advisory Services, said in an interview last week. "Who needs tax protection when we are having losses and write-downs?"

As demand slowed from buyers who have been counted on to drive a lot of the purchasing in recent years, retail investors did not pick up the slack. Their reluctance was based in part on low absolute interest rates that made them reach in duration to get the yields of 4% or 5% that they like.

On Jan. 31, investors would have had to buy a bond at par that matured in 2025 to get a yield of 4.06%, according to Municipal Market Data. That's a lot of duration risk for little return, in the eyes of many retail investors.

Questions about short-term products also caused issuers to stay on the sidelines. Rising yields in auction-rate bonds led many to consider variable-rate demand obligations, a similar product that often requires letter of credit. The use of LOCs increased 244.4% this January over last year, on 66 deals for total volume of $1.55 billion.

"That's obviously a replacement for auctions," Jerry Solomon, municipal bond analyst and senior managing director at Bear, Stearns & Co., said last week. "You still might see a few new auctions with the right structures, but I think instead of people utilizing auctions from a new-issue perspective, if they can get the direct letter of credit, that's the gold standard right now."

Insurance overall declined 68.8% over last year. Just 261 deals employed bond insurance in January for a volume of $5.46 billion, compared to 450 deals that used it in January 2007 for a volume of $17.52 billion. Insurance penetration was just 28.1%, well below the 56.1% of debt insured last January.

In spite of the low overall volume and the market dislocations, some states saw an increase in issuance over last year's first month. Texas jumped from third overall in January 2007 to first in 2008. Texas issuers sold $3.34 billion of bonds through 76 transactions, a 21.1% increase over last year's totals of $2.76 billion in 80 deals.

The increase was led in part by the Texas Transportation Commission's $1.1 billion general obligation sale and two smaller deals worth a combined $458 million.

Among state issuers, Washington led the pack, selling $921.2 million of various-purpose and mass transit GOs.

The results of the competitive sale - which Treasurer Michael Murphy said he was pleased with - illustrate the two-tiered market currently in place. Washington is rated AA-plus by Standard & Poor's and Fitch Ratings and Aa1 by Moody's Investors Service.

"The market wasn't bad at all," Murphy said. "We were very pleased with the results of the deal, it was a 4.31% [true interest cost] and all the bonds sold at a premium so [we] got an extra $60 million. We borrowed $921 million and got cash at settlement of $984 million." q

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