Most of the competitive deals scheduled for auction this week will be marketed primarily towards retail investors, market participants said.
Retail investors will buy-up most of the competitive deals, they said, because investors predict the bonds will come with with lower coupons.
"Competitive issuances will have more 3%, 3.5% coupons, which fit retail and some insurance companies, but other than that there's not a great deal of support," a trader in Florida said.
The current supply-demand dynamics in the muni market are causing deals this year to be priced richly. Total volume as of May 31 was $113.3 billion, compared to $153 billion for the same period last year.
Low supply has combined with rising investors demand .Municipal mutual funds continued a year long trend, reporting an inflow of $634.5 million for the week ending May 28, according to Lipper FMI.
"There was a big change from April into May in the coupon structure," the trader in Florida said. "It's because underwriters were so competitive trying to buy market share, they were going more into the [low coupon] position."
The trader in California said this makes it difficult for institutional investors to buy the competitive deals.
"Even though [competitive municipal bonds] are cheap to treasuries, its hard psychologically to buy a long duration asset with a 3 yield handle," he said. "It takes a lot to get used to that."
He anticipated that retail, insurance companies and muni funds will buy up most of the competitive deals this week.
"The danger component with [the competitive deals this week] is you look at the change in structure at what competitive underwriters are pricing deals at," the trader in Florida said.
A competitive $140 million Ventura County, Calif., tax and revenue anticipation note sale received strong demand on Monday, investors said.
JPMorgan Chase won the bid with an effective rate of 0.126% and a 1.5% coupon.
"There is plenty of demand for California paper," the trader in Florida said.
The deal was rated MIG1 by Moody's Investors Service.
"I'm sure that [California debt] will be in demand," the trader in California said.
Market participants said deals from issuers like Ventura County issuance are attractive because they don't issue as often as the state. Fred Bacani, head of Fixed Income and Trading at Veritable LP in Newtown Square, Pa., said in an interview there is some value in subordination, or buying bonds from a state's lesser-known municipalities or buying debt other than state GOs.
The Ventura County notes allow investors to get California paper on their portfolios and increase their diversity.
"During a typical cycle when you get low volume and lower rates, you get a spread compression," the trader in California said. "There is an incremental yield difference between the California GO name and names without much sponsorship. People tend to look away from [the most familiar] name."
Although several California deals are scheduled this week, the trader added, it will not lower the demand for any single deal.
"I don't think the calendar is big enough to overwhelm the California market," he said. "Especially because California investors buy California bonds, and [the California government] loves to raise taxes in California. The California paper coming to market is not big enough to lessen investors' demand for California paper."
California issuance this week includes Los Angeles County's plan to sell $900 million in tax and revenue anticipation notes on Wednesday.
Kern County is scheduled to auction $200 million revenue appreciation notes on Thursday. Bank of America Merrill Lynch on Thursday is expected to price $143 million Los Angeles County Regional Financing Authority mortgage loan insurance bonds on behalf of Montecedro.
There are four competitive deals expected this week that total over $100 million, led by the $274 million Metro Atlanta Rapid Transportation Authority revenue bonds scheduled for Thursday and the $258 million Columbus, Ohio, bonds on Wednesday.
"There is an uptick in competitive deals," the trader in Chicago said. "Competitive deals are coming because it's an attractive new issue market."
Janney Capital Markets wrote in a report Monday that the market is attractive for issuers because interest rates have dropped most of the calendar year to date.
"So far, 2014 could be called a year for issuers," Tom Kozlik, municipal credit analyst at Janney Capital Markets, wrote in the report. "Funding costs remain low from a relative perspective. If interest rates continue to fall as they mostly have in 2014, then the new issuance calendar could start to build at a quicker pace than in recent months."
Municipal bond yields rose Monday, according to Municipal Market Data's triple-A scale. Bonds maturing in three years rose one basis point in yield, and by two basis points for 12-to 30-year maturities. Bonds maturing in four-to nine-years yields' rose by two basis points in yield and by three basis points for 10-to 11-year maturities. Yields for the two-year held steady, according to Municipal Market Advisors' data. They grew by two basis points for the 10-year and 30-year to 2.19% and 3.45% respectively.
Treasuries weakened Monday, with 30-year yields climbing four basis points to 3.37% and the 10-year benchmark jumping seven basis points to 2.54%. The two-year notes inched up two basis points to 0.40%.
