Deal supply will slip again as a $400 million Metropolitan Transportation Authority issue is expected to be the biggest transaction of the holiday shortened week amid a seasonal slump in volume.
According to Ipreo LLC and The Bond Buyer, long-term new issuance is estimated at $2.28 billion this week. The expected volume compares with the $3.43 billion of revised issuance that was reported by Thomson Reuters last week.
"It's just a slow ride in here," a New York-based trader said. "It's always slow in January and February, but it's a little slower than usual. I think we are just going through a temporary volume-related drought," he added.
"Due to lack of new issuance this week, MSRB trading volume was relatively light at $6.9 billion, compared to $12.7 billion average for the prior four Thursdays," wrote Alan Schankel, managing director at Janney Montgomery Scott on Friday in a daily fixed income report.
The MTA's transportation revenue bond sale of serial and term bonds will be led by Morgan Stanley on Thursday, following a Wednesday retail order period. The bonds are rated A2 by Moody's Investors Service and A by Fitch Ratings, while the Standard & Poor's rating was not yet confirmed at press time.
Citi will price a $201 million sale of Louisiana state highway improvement revenue bonds on Wednesday. Maturing from 2015 to 2034, the bonds are rated Aa3 by Moody's, and AA by Standard & Poor's and Fitch.
The Georgia Housing & Finance Authority will bring a $156 million sale of single-family mortgage revenue bonds also led by Citi on Thursday, following a Wednesday retail order period.
Though volume will be low, he market should benefit from policies such as tapering of the Federal Reserve's economic stimulus, some muni professionals said.
"The tighter policy is being felt globally -- especially in emerging markets -- and this should lend support to fixed-income in general and municipal bonds in particular," said Michael Pietronico, chief executive officer at Miller Tabak Asset Management.
With little volume in recent weeks, analysts said the impact of Puerto Rico's downgrade by all three major rating agencies and its planned GO sale later this month has stolen the attention.
Gov. Alejandro García Padilla asked the Puerto Rico legislature to approve up to $3.5 billion aimed at refinancing obligations and addressing liquidity concerns, which were a key factor in the downgrades.
Issuing the junk-status GOs means much higher yields, market participants said, questioning whether there will be enough demand to support the new deal.
"With many funds prohibited from buying high-yield names there is definitely doubt," said Anthony Valeri, market strategist at LPL Financial. "At yields above 8% to 9% there is interest, but below that, demand does not seem sufficient."
Schankel of Janney said trading levels in block size Puerto Rico bonds in the secondary market have remained firm during and after the downgrades. Puerto Rico GOs with 5% coupons due in 2041 trading at 7.98% on Thursday were "consistent with the 8% area of recent block trades," he said.
The commonwealth will conduct a webcast at 2 p.m. on Tuesday ahead of the deal, which will be led by Barclays Capital, RBC Capital Markets and Morgan Stanley.
"The key for now is access to needed liquidity and getting this deal done," Valeri added. "That will buy P.R. some time and get the commonwealth past a key hurdle."
Besides the upcoming Puerto Rico sale, a $1 billion offering of highway revenue bonds from the Texas Transportation Commission is expected to be priced next week by Piper Jaffray Inc.
