After a strong start to the week followed by weakness towards the end, the tax-exempt market ended on a stronger note Friday, following Treasuries.

“I’d say it’s certainly a quiet day today,” said a regional broker-dealer in the mid-east region. “It’s definitely firmer and I’d put it up a solid two basis points 10 years on out. There’s not enough flow today to make that a broad assessment but based on what we’re seeing I’d say that.”

While activity started to pick up, others said munis continued to trade in a wait-and-see mode until uncertainty over the election and fiscal cliff is resolved.

“It’s slow on this Friday,” a New York trader said. “It feels as if we’re in this continued wait-and-see what is going to happen with the election. So we’re getting some business done and orders are getting executed but still business has been slow for most of month.”

The trader added muni yields will follow Treasury yields until some more clarity is provided on the economist. “Everyone is worried about this fiscal cliff that neither candidate wants to address.”

With the primary out of the way, the secondary market saw all the action Friday. Trades compiled by data provider Markit showed mostly strengthening. Yields on Arizona’s Salt Verde Financial Corp. 5s of 2037 plunged four basis points to 3.98% while Fort Bend County, Texas, Industrial Development Corp. 4.75s of 2042 fell three basis points to 4.60%.

Yields on New York City Municipal Water Finance Authority 5s of 2039 and New Jersey Turnpike Authority 5s of 2028 dropped two basis points each to 2.75% and 2.87%, respectively.

On Friday, the Municipal Market Data scaled ended stronger. The benchmark 10-year muni yield and the 30-year yield fell two basis points each to 1.73% and 2.83%, respectively. The two-year remained at 0.30% for the 23rd straight trading session.

Treasuries posted gains Friday. The benchmark 10-year yield plunged seven basis points to 1.76% while the 30-year yield dropped six basis points to 2.92%. The two-year yield fell two basis points to 0.31%.

And while yields on municipal bonds this week moved no more than three basis points in any direction, high-yield municipal bonds have performed extremely well year-to-date, returning 15.49% according to JR Rieger, vice president of fixed income at Standard & Poor’s Dow Jones Indices. That compares to the 6.35% year-to-date return by investment grade munis.

“The supply-demand imbalance continues to hold municipal bond yields low as cash inflows into municipal bond funds is putting pressure on fund managers to find and buy bonds,” he wrote. “Municipal bonds with any incremental yield have seen the highest demand.”

Indeed, the Illinois-specific index has returned 8.13% year-to-date while the California-specific index has returned 8.02%. The New Jersey-specific index has returned 7.79% year-to-date.

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