The tax-exempt market ended firmer for the third session on Friday as demand outweighed supply and prices followed Treasuries higher.

Many traders said the technicals for the market are expected to stay strong in the coming weeks as Labor Day will keep new-issue supply well below average levels.

"It's slowly firming," a Chicago trader said. "Supply is gone. It just disappeared. I literally went away for two days on Tuesday and the 10-year Treasury yield is down almost 20 basis points. So if the 10-year Treasury stays firm and rallies, we could continue to quietly firm next week. You could see some underwriters coming in and clearing off the desk."

There is still a scarcity of 5% coupon bonds, which is helping drive the market higher, he added. "There hasn't been much change for the 2% and 3% coupon bonds, and those have stayed slow," he said. "But the 5% coupons are up."

Friday morning, traders said the market was moving higher. "It's flat, but actually some people might say it's higher," a New York trader said. "But I got guys hitting bids. I have bidders coming in bidding down from the offering and getting hit."

On Friday, the 10-year Municipal Market Data yield and the 30-year yield both dropped two basis points to 1.79% and 2.93%, respectively. The two-year closed at 0.29% for the 22nd straight session.

The gains on Friday pushed muni yields down to levels not seen since Aug. 13, when the 10-year closed at 1.76% and the 30-year finished at 2.92%.

Treasuries were choppy on Friday and ended the day weaker. The benchmark 10-year yield jumped two basis points to 1.69%. The two-year and 30-year were steady at 0.28% and 2.79%.

In the secondary Friday, trades compiled by data provider Markit showed mostly firming. Yields on California 5.5s of 2035 and Sonoma County, Calif., pension obligation 6s of 2029 fell three basis points each to 3.16% and 4.89%, respectively.

Yields on Michigan Tobacco Settlement Financing Authority 6s of 2048 and New York's Metropolitan Transportation Authority 5s of 2027 dropped two basis points each to 7.37% and 2.84%, respectively.

Still, other trades showed some weakening. Yields on Massachusetts 5s of 2025 and Mansfield, Texas, Independent School District 4s of 2025 rose one basis point each to 2.11% and 2.41%.

While it was a volatile period for munis, with yields rising in the early part of the week and falling towards the latter, muni-to-Treasury ratios rose as munis underperformed Treasuries and became comparatively cheaper. The five-year ratio jumped to 103.6% on Friday from 86.3% the week before. The 10-year ratio rose to 105.9% from 102.7%. The 30-year ratio increased to 105% from 102.7%.

Munis have generally followed that trend since the beginning of the year, at least in the short and intermediate part of the curve. Since the start of 2012, the five-year ratio has jumped to 103.6% from 98.9%. In the 10-year range, ratios jumped to 105.9% from 96.4% at the beginning of the year.

In the 30-year range, ratios have fallen as munis outperformed and became relatively more expensive. The ratio dropped to 105% from 119.4% at the start of 2012.

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