The municipal market is expected to see $5.26 billion of new supply this week, after the July 4 holiday helped drop last week's issuance to $878.4 million.

The negotiated market will make up most of this week's deals, with $4.24 billion expected, according to The Bond Buyer and Ipreo LLC.

The competitive market will see just over $1 billion. Both figures are up dramatically from last week's revised $756.4 million in negotiated issuance and revised $122 million in competitive offerings, according to Thomson Reuters.

The biggest deal expected this week is Wednesday's $760 million taxable and tax-exempt offering from the Dormitory Authority of the State of New York, which will be priced by Wells Fargo. A retail order period on Tuesday will precede institutional pricing.

The issue contains $45 million of taxable bonds. The remainder is tax-exempt. The bonds are rated AAA by Standard & Poor's and AA by Fitch Ratings.

The Michigan State Building Authority will issue almost $600 million of revenue and revenue refunding bonds. Institutional pricing is expected Tuesday, with a retail order period Monday. The bonds are underwritten by JPMorgan and are rated Aa3 by Moody's Investors Service and A-plus by Standard & Poor's.

The series and term bonds have maturities ranging from 2012 to 2031. About $12 million of the bonds are taxable.

The market so far this year has been able to absorb new volume quite easily, a trend that should continue this week.

"Tax-free municipal bonds had a strong month in June, with little difficulty absorbing increased new-issue volume," said Tom Kozlik, municipal credit analyst at Janney Capital Markets. And while yields moved higher following Treasury yields, "munis generally outperformed taxables issued in the recent rising rate environment."

As summer approaches, the market should also be able to continue to absorb supply.

"The supply side of the scale is benefiting from strong summer reinvestment," said Alan Schankel, managing director at Janney. "July and August will see about $55 billion of maturities and redemptions, comfortably offsetting anticipated new- issue volume."

In the competitive market Tuesday, Colorado will issue $500 million of short-term notes rated M1G-1 by Moody's and SP-1-plus by Standard & Poor's.

Also on Tuesday, Harris County, Texas, will come to market with $450 million of short-term notes rated F1-plus by Fitch.

John Hallacy, head of municipals research at Bank of America Merrill Lynch, said municipals outperformed other asset classes in June, returning 0.51%, and the triple-B-rated category had the best total return for the month at 1.78%. And given strong performance, supply in July should remain strong.

Analysts also say a decrease in headline risk will help drive municipals for the remainder of 2011, and that general obligations and essential-service bonds should do well.

"Concerns and anxiety surrounding state and local government credit have decreased … mostly because almost all emerging figures have been more positive than expected, from a credit perspective," Kozlik said.

He added that state governments have reported five consecutive quarters of higher revenue and, most crucially, there haven't been any government defaults or bankruptcies.

"State and local governments remain willing and able to pay debt service and default statistics show Meredith Whitney's prediction looks significantly overstated," he said. "We still recommend retail investors build their portfolios with strong quality general obligations, essential service, and other credible revenue bonds."

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