An already-skimpy municipal market is expected to see volume levels plummet even further this week when a paltry $1.79 billion of new issuance trickles into the primary, according to Ipreo LLC and The Bond Buyer.
The subdued issuance arrives amid a month-long rally in municipals that has sparked continued selling at the same time that Treasury yields continue to move lower.
Last week, under much of the same circumstances, a revised $5.95 billion came to market, according to Thomson Reuters, $2 billion less than the typical weekly average of $8 billion.
"February appears on target to finish with issuance of about $15 billion to $18 billion, meaning the first two months of 2011 will have seen a cumulative deficit of $20 to $23 billion in issuance versus the five-year average," Matt Fabian, managing director of research at Municipal Market Advisors, said in his weekly outlook.
"While this has made room for forced selling in the secondary market, it has also deprived traders and portfolio managers of their primary source for pricing guidance, and dealers their principal tool for setting market tone," he wrote. "The lack of a primary has worsened the top-down flow of information, reasonably undermining market momentum and exacerbating illiquidity."
Given the year-to-date slump, some market participants are reevaluating their March volume forecasts — and consequently their first-quarter estimates.
John Hallacy, head of municipal research at Bank of America Merrill Lynch, said even though March tends to be more active than January and February, his firm has lowered its estimate for the month to $28 billion from $35 billion.
"Our estimate for 1Q now stands at approximately $60 billion, versus our initial estimate of $84 billion," Hallacy wrote in his weekly municipal commentary.
On Tuesday, Louisiana is slated to price $300 million of unlimited-tax general obligation bonds that it hopes will stand out among the limited volume.
Scheduled for competitive pricing on Tuesday, the deal is structured to mature from 2011 to 2030.
It is rated Aa2 by Moody's Investors Service and AA by Standard & Poor's and Fitch Ratings.
In a report, Fitch said its rating is supported by "continued timely action to maintain budget balance and maintenance of solid financial balances."
Louisiana last sold GO refunding bonds on Oct. 5. The $206.4 million competitive sale was won by Barclays Capital at a true interest cost of 2.8553%.
Structured to mature from 2013 to 2022, the final maturity carried a 5% coupon that was priced to yield 2.98% — 24 basis points higher in yield than the generic triple-A GO scale in 2022 at the time of the pricing, according to Municipal Market Data.
In other activity, $178.5 million from the Michigan State Hospital Finance Authority is expected to be priced by Citi on Tuesday. The project revenue and refunding bond deal is structured as a one-year put maturing on March 1, 2012. It is rated Aa1 by Moody's and AA-plus by Fitch.
Also in the Midwest, the Illinois Finance Authority is readying $131.6 million of student housing revenue bonds slated for pricing by RBC Capital Markets LLC on Wednesday. Proceeds will finance projects at the Illinois State University.
The offering is rated Baa3 by Moody's and BBB by Standard & Poor's.
The deal will likely carry yields that are elevated beyond 4.69%, which is where generic triple-A GO bonds due in 30 years ended on Friday, according to MMD.