The tax-exempt market continued to post gains Friday afternoon as traders said dealers were replenishing inventory and willing to pay up in price to get bonds back on their books.

“You can sell into the frenzy and make some money but right now it’s hard to justify selling,” a Chicago trader said. “The short-end of the market has been extremely strong. The longer-end has gotten the benefit of this but that could be a lot more vulnerable than the short-end.”

“I’ve been able to get business done and buy more today than the last couple days,” he said. “Guys need inventory to be able to show things so there are a lot more secondary trades.”

Still, this trader said the market is reaching a super saturation point and could reverse directions at any time. “We’ve had a huge run based on the lack of supply but if all of a sudden issuers want to take advantage of rates and come into the market, you could see this rally change direction.”

On Thursday, yields on the triple-A Municipal Market Data scale ended as much as seven basis points lower. The 10-year and 30-year yields fell six basis points each to 2.61% and 4.23%, respectively. The two-year yield fell two basis points to 0.38%.

Yields on the Municipal Market Advisors scale ended as much as eight basis points lower. The 10-year and 30-year yields slid six basis points each to 2.77% and 4.31%, respectively. The two-year yield fell one basis point to 0.54% after trading steady at 0.55% for 24 consecutive sessions.

Treasuries were stronger Friday. The benchmark 10-year yield fell three basis points to 2.72% and the 30-year yield dropped four basis points to 3.76%. The two-year yield slid one basis point to 0.34%.

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