Midterm elections to be held in the fall of 2014 are another force pushing against any potential resurgence in municipal bond issuance over the next year.
Cities and towns looking to begin new projects will be stifled by political leaders hesitant to take on additional debt burdens ahead of an election, market participants said.
"There doesn't seem to be an appetite to fund things right now and it's kind of exaggerated in election years even more so," Dan Heckman, a fixed income strategist at US Bank, said in an interview. "You're not going to see someone bring forth some kind of proposal if they may not get the spotlight or support they need."
The reluctance by political leaders to initiate new debt-financed projects during an election season, is just one more reason market observers are expecting low issuance in the new year.
"No one wants to strap on debt when you're going in to get elected," a trader in Florida said in an interview. "There's a debate over increasing debt on shovel-ready projects. Those political issues are really starting to creep in there."
Long-term municipal bond volume in 2013 fell 12.5%, and an analysis by The Bond Buyer showed top underwriters predicting an average drop of another 10% in 2014.
Municipalities remain hesitant refund debt for ongoing projects.
"There have been fewer refundings versus last year," the trader said. "We don't know why the issuers aren't willing to step up and do some of these refundings now, because rates are going to rise."
Traders and analysts said voters in many regions of the U.S. have yet to emerge from the burden of the recession, and with taxes set to increase for some brackets, citizens aren't voting for new projects.
"Most issuers are beginning to make the necessary changes to function in the post-2010 economy, while about 10-20% of local government issuers have not yet adapted to the new economy, making them susceptible to rating downgrades," Janney Capital Markets' Tom Kozlik and Alan Schankel wrote in a report Friday.
While the lack of supply has frustrated buy-side market participants, issuers that came to market this past week were able to price bonds at aggressively low yields.
New bond issuance this week came to just $2.49 billion, compared with the $2.76 billion originally expected, according to Thomson Reuters. Issuance next week could reach $5.28 billion, according to data from Ipreo and The Bond Buyer.
Muni bond yields firmed by as much as three basis points Friday, according to Municipal Market Data. Firming was limited to as much as a basis point on bonds maturing within ten years, Municipal Market Data reported.
The benchmark 10-year treasury yield gained one basis point to 2.67%.
