A stubborn municipal market stood by Friday and watched Treasuries prosper in the face of financial fires erupting in Europe. The market is stuck in neutral, while the 10-year Treasury yield hit a new calendar-year low.

Retail muni bond investors aren't watching the news about Greek austerity reforms or Italian bank stress tests. And if they are, they're drawing the wrong conclusions, a trader in California said. They're not seeing how the Greek financial crisis has helped out the bond market. It's lost in translation, he said.

"The global picture is not translating for the retail masses," the trader said. "They're not coming to the market and buying [munis]. If anything, we're seeing people trying to potentially sell into it."

And in the secondary market, he added, bids on less-than-block size are extremely inconsistent these days.

As far as yields are concerned, tax-exempts started out flat across the curve and failed to move throughout the day, according to Municipal Market Data.

The 10-year benchmark yield held at 2.63% for the seventh day in a row, the MMD scale showed. The 30-year yield held at 4.23% for a second straight day, its low since Nov. 12.

The two-year yield, at 0.42% for the 10th consecutive day, is hovering at its lowest level since Sept. 7, according to MMD numbers. Before that, it stayed at 0.44% for 17 straight sessions.

The resistance contrasts with the Treasury market over the last month, where the 10-year Treasury yield has plummeted 26 basis points.

"We've to a certain extent lost a lot of our retail distribution just because of lower nominal yields," the trader said. "And there are still some concerns with regard to state and local budgets, and what kind of financial state those are going to be in, going forward."

Treasury yields mostly firmed across the curve Friday. The 10-year yield dropped five basis points to 2.87%. The two-year yield slipped two basis points to 0.34%. The 30-year yield stagnated at 4.18%.

Treasury notes in particular saw good buying Friday as the major equities indexes all fell around 1%, wrote MMD analyst Randy Smolik. While high-grade munis failed to benefit, lower-graded product continues to see more buying appetite, at least according to mutual funds.

Supply should continue to hold at relatively moderate levels. Munis slated for sale this week total $5.62 billion against a revised $5.82 billion last week, according to The Bond Buyer.

This would mark the fourth consecutive week in which issuance has exceeded $5 billion. Two weeks ago, the market saw $5.11 billion, following $7.8 billion the week before. For the year, new deals have averaged around $3 billion.

Muni bond funds also posted modest inflows for two of the last three weeks, after 29 straight weeks of outflows beginning November, according to Lipper FMI numbers.

But the numbers show investors' concerns about where to find yield in today's market, Chris Mauro, a research analyst at RBC Capital Markets, said in a research note.

Among the top 10 funds by inflows, which accounted for almost 50% of total inflows, three were high-yield funds and six were short/ultra-short funds.

"Therefore," Mauro wrote, "while we are seeing a welcome turnaround in fund flows after a disastrous seven months of outflows, the flows thus far aren't as broad-based as we would like, as investors' interest in investment-grade munis at current yields continues to be tepid at best."

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