The tax-exempt market ended the week on a steady note after a big rally that brought yields to record lows.

Traders said the rally throughout the week — and month of November — can be attributed to looming tax increases expected next year as well as a general risk off trade over fears about the fiscal cliff.

Uncertainty about the future tax treatment of municipals bonds has not stopped buyers from entering the market as inflows continue into municipal bond funds.

A Los Angeles trader said the market has been higher for weeks, driven mainly by the fact that tax rates are going to go up. “It’s been a strong couple of weeks,” he said. “It’s going back to the election and the expectation that there are going to be higher rates.”

With higher tax rates already approved by the voters in California, California general obligation bonds have seen support over recent weeks as investors look for a haven from those looming higher taxes. “There is definitely a positive feeling for California GOs which has driven that market higher and the rest of the country too. There is so much money flowing into municipal bond funds.”

He added going forward, supply is expected to decrease as the end of the year approaches and what little selling pressure there is will be reduced further. “A lot of the institutions will start shutting down in the middle of December so looking forward you see very little reason to think prices are going down.”

Other traders agreed that munis are benefitting from a general risk off trade.

“Fund flows were again strongly positive,” said Dan Toboja, vice president at Ziegler Capital Markets. “Any concerns about the fiscal cliff and partisan gridlock are unable to slow retail investors surging toward munis.”

He added munis saw great reception in the primary coupled with decent follow-through in the secondary. “The new issues this week were well oversubscribed with some deals 10 times oversubscribed and deals being bumped 20 basis points in some cases and still able to be comfortably done.”

Lower rated health care deals in particular saw strong reception in the secondary. “Health care deals especially have seen some follow through with trades occurring at up levels regularly.”

The Municipal Market Data scale ended steady on Friday after a week-long rally. The 10-year yield finished flat at 1.47%, its record low set Wednesday, for the third trading session. The 30-year yield also finished steady at 2.47%, its record low, for the third consecutive trading session. The two-year finished steady at 0.30% for the 45th consecutive trading session.

The Treasury yield curve steepened Friday afternoon as yields on the short end fell while yields on the long end rose. The two-year yield fell two basis points to 0.25% while the 30-year yield jumped two basis points to 2.81%. The benchmark 10-year yield was flat at 1.62%.

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