The tax-exempt market saw plenty of demand this week and muni yields fell to new record lows with each trading session. Market participants expect the rally to continue into next week as limited supply won't come anywhere near to matching demand.

"Munis feel like they can't be stopped," wrote Dan Toboja at Ziegler Capital Markets. "The market had another up day Thursday. Demand was extremely solid and new issues were again scooped up."

Looking to next week, Toboja said the market is expected to be quiet. "Next week is holiday-shortened again and the new issue calendar shows it. Away from the $1 billion [Texas Municipal Gas Acquisition and Supply Corp.] deal slated there is little in the way of issuance. With only a fraction of normal supply and higher-than-average demand the market has not backed off these low yields."

"Most likely there won't be any kind of selloff prior to the Thanksgiving holiday, but supply is unusually anemic for Q4; whether or not that continues remains to be seen," he added.

In the primary market next week, $2.25 billion is expected to be priced, down from this week's revised $6.03 billion. On the negotiated calendar, $1.97 billion is expected to be issued, down from this week's revised $3.95 billion. In competitive sales, $276 million should be auctioned, down from this week's revised $2.08 billion.

The Municipal Market Data scale has been setting new record low yields with each passing day this week and that trend continued Thursday. The MMD scale posted gains Thursday for the eighth consecutive session and record low yields were set yet again.

The 10-year yield dropped three basis points to a record low yield of 1.51%. The record beat the 1.54% set Wednesday and the 1.55% set Tuesday.

The 30-year MMD yield plummeted five basis points to 2.55%, also setting a record low. The 2.55% low beat the previous record of 2.60% set Wednesday and 2.64% set Tuesday.

The two-year finished steady at 0.30% for the 35th consecutive trading session.

Treasuries were steady Friday morning. The benchmark 10-year yield and the 30-year yield were flat at 1.58% and 2.72%, respectively. The two-year was steady at 0.24%.

In economic news, industrial production fell 0.4% in October while capacity use slipped to 77.8%. Both figures were short of economists' expectations of a 0.2% rise in production and capacity use at 78.3%.

"We are very skeptical about the estimated impact of Hurricane Sandy on manufacturing activity and, therefore, on the extent of the drop in production," wrote economists at RDQ Economics. "In the first release of industrial production only 27% of production is based on physical output data, while 41% is imputed from hours worked and the rest is essentially guessed by the Fed."

They added, "Since the hurricane downed power lines across the tri-state area, one might assume that electricity generation would be significantly reduced by the storm, but the Fed reports that this industry increased output by 0.2% in the month and by 1.3% over the last 12 months. The Sandy impact of nearly 1% of output was estimated using FEMA data on which counties were affected by the storm and employment weights for the importance of these counties. It seems to us that the Fed might have overestimated the drop in output and that we will see upward revisions to October output over the next couple of reports."

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