UPDATE 1-U.S. munis swept up in 2010's steepest slide

(Recasts; adds details on deals. background)

By Michael Connor

MIAMI, Nov 16 (Reuters) - Awash in a deluge of new debt offerings, the U.S. municipal bond market on Tuesday was caught up in the year's worst sell-off that shows no sign of ending quickly.

Tax-free bond prices slid steeply for a second straight session, taking yields up in most maturities of top-quality, debt at a double-digit pace as high as 18 basis points.

Since Nov. 5, yields on closely watched AAA-rated 10-year and 30-year maturities on Municipal Market Data's benchmark scale have shot up by at least 40 basis points, a sharper, more concentrated change than sell-offs in March and September, according to MMD analyst Domenic Vonella.

Portfolio managers, analysts and bond traders said the increase in new deals was aggravating qualms about possible U.S. tax policy shifts, the credit worthiness of some issuers and ugly relative values compared with Treasuries.

Munis are a favorite of affluent, often-retired individual investors because they provide tax-exempt interest payments and are widely regarded as stable assets. Some portfolio managers have said a sharp muni-market correction was needed to raise yields to levels needed to lure individuals back.

Inflows to muni bond mutual funds, a key indicator of demand by small investors in the $2.7 trillion market that finances roads, schools and other infrastructure, have shriveled in recent weeks.

"It's a perfect storm," Vonella said.

Signs for a quick turnaround in prices were few, according to the latest weekly MMD survey of traders and portfolio managers. Bearish sentiment for the week ahead more than doubled from 36 percent to 79 percent.

Dour expectations for the coming four to eight weeks rose to 50 percent from 27 percent, according to MMD.

New offerings flowing from cities, states and other governments were a chief concern, according to a survey.

This week's new deal calendar was forecast to nearly triple to $24.4 billion this week, although a chunk of that was taxable debt, mostly in the form of Build America Bonds. Tax-exempt supply was estimated at $8 billion to $10 billion.

Prices of AAA-rated munis tracked by MMD fell enough at midday to lift yields by as much as 18 basis points, according to MMD's preliminary reading for Tuesday. Tax-free yields jumped as much as 12 basis points on Monday.

On Monday, yields on top-rated 30-year bonds finished up 11 basis points at 4.31 percent. The 10-year closed at 2.75, up 11 basis points from Friday, according to MMD.

Meanwhile, some issuers were choosing to get out of the way of the week's huge supply as several competitive bond sales were postponed. A $380 million Wisconsin Health and Educational Facilities Authority revenue bond issue for Aurora Health Care was downsized to $142 million due to market conditions, according to a market source.

A $180 million revenue refunding bond issue for Georgia's Gwinnett County Water and Sewerage Authority was pulled after the county on Tuesday rejected all the bids it received due to market volatility, said Michael McDonald, a financial advisor at Public Financial Management.

"We were not able to achieve the required savings on the deal," he added. (Additional reporting by Caryn Trokie in New York and Karen Pierog in Chicago; Editing by Andrew Hay)