In both months the amount of debt refunded exceeded new money deals as issuers sought lower interest rates.

Yields fell to all-time lows on Municipal Market Data's benchmark triple-A scale in January, spurring issuers to refund outstanding debt at lower rates. While yields have crept higher since then, refunding issues continue to hit the $3.7 trillion market.

Issuance in the U.S. municipal bond market so far this year totaled $41 billion, outpacing the $28.5 billion of debt sold during the same period in 2011. But this year's pace lags the $59.5 billion sold in the first two months of 2010, when issuance for the entire year hit a record-high $430.5 billion, the data showed .

Refundings have accounted for nearly $24 billion of this year's $41 billion.

California this week is selling nearly $2 billion of general obligation refunding bonds. By midday California time on Wednesday, retail buyers had snapped up just over $900 million of the deal during a presale period ahead of formal pricing on Thursday, according to Tom Dresslar, a spokesman for the state treasurer's office.

Puerto Rico is planning to sell $1.5 billion of public improvement GO refunding bonds next week, along with $400 million of refunding bonds that will be marketed to local investors in the commonwealth.

The Puerto Rico Aqueduct and Sewer Authority is the top issuer of debt so far this year at $2 billion, followed by the state of Washington at $1.56 billion, the New York State Dormitory Authority at $1.22 billion and New York City at $1 billion, according to Thomson Reuters data.

The market noted with concern Stockton, California's plan to default on some of its debt and enter into mediation with its creditors as part of an effort to restructure the city's finances.

Stockton's city council approved the plan late on Tuesday night after the city manager said on Friday he would urge council members to endorse it.

Skipping bond payments is inherently controversial for the market. But the part of the plan calling for mediation with creditors also raised eyebrows as it follows a new California law requiring such talks, which may last up to 90 days, before a local government can file for bankruptcy.

Stockton's leaders hope the talks will to help them close a budget gap seen ranging from $20 million to $38 million. If mediation does not work, municipal bankruptcy remains an option for the city of 292,000 about 85 miles east of San Francisco.

One concern for the market stemming from Stockton's plan is the potential that some other financially troubled local governments in California could also try to get breaks from bondholders.

"I'm just wondering if Stockton's actions are going to prompt some people to say 'Hey, we've got a quick fix here,'" said Dick Larkin, director of credit analysis at Herbert J Sims & Co in Iselin, New Jersey.

Standard & Poor's Ratings Services earlier this month slashed its ratings on revenue bonds issued by Hercules, California, and said it may downgrade the city further due to comments by officials there regarding a potential municipal bankruptcy.

In Wednesday's secondary market for munis, prices ended unchanged to slightly lower. The yield on top-rated 10-year munis rose a basis point to 1.85 percent, while the 30-year yield also jumped 1 basis point to 3.23 percent, according to MMD, a unit of Thomson Reuters.