NEW YORK – The tax-exempt market followed Treasuries higher Monday morning, as European woes pushed investors into safe haven assets.

Munis rallied according to the Municipal Market Data scale. Yields were steady inside four years, and fell two basis points on the five- and six-years. Yields on the seven-year fell three to five basis points while the eight-year yield dropped four to six basis points. Outside nine years, yields plunged five to seven basis points.

On Friday, the 10-year yield fell two basis points to 1.77% while the 30-year yield dropped four basis points to 3.23%. The two-year muni yield closed steady at 0.35% for its 11th consecutive trading session.

“These bumps seem just a bit exaggerated, almost entirely based off of the Treasury move this morning,” said a New York trader. “Then again, it is Monday and supply this week still seems tight so the bumps may be warranted, just a bit early.”

On Monday, Treasuries rallied to levels not seen since Jan. 18th. The benchmark 10-year yield fell six basis points to 1.84% while the 30-year yield dropped nine basis points to 2.98%. The two-year was steady at 0.22%.

In the primary market this week, $3.96 billion in bonds are expected to hit the market, up from last week’s $3.5 billion. On the negotiated calendar, $2.57 billion is expected to be priced, down from last week’ revised $2.82 billion. About $1.38 billion of competitive deals are expected, up from $673.8 million last week.

“The municipal bond market had a terrific January, on both a nominal as well as a relative basis, as the market continued its trek out of the wilderness that dominated the first part of 2011,” said John Mousseau, head of tax-free munis at Cumberland Advisors. “The spark that set this rally off was the usual year-end supply distortion, with an estimated $35 billion of coupon payments, called bonds, and maturing bonds in the combined months of December 2011 and January 2012.”

With fairly low nominal yield levels, Mousseau said he is starting to shorten durations and maturities. “We are starting to add more short-term bonds, cushion bonds, and municipal inflation-indexed bonds. These low yields should spur on issuance later in the year and we feel that continued economic growth, while slow, should result in overall higher yield levels later in 2012.”

In economic news, personal income rose 0.5% or $61.3 billion in December, the largest gain since February 2011 when personal income grew 0.6%. The December increase came after a 0.1% gain in November, the Commerce Department said. The gain was greater than the 0.4% expected by economists.

Personal spending fell $2 billion, or less than 0.1%, in December. That decrease came after a 0.1% gain in November. Economists had predicted a 0.1% increase in December.

“From the perspective of Keynesian aggregated demand theory this was a disappointing – but after GDP hardly surprising – report,” wrote economists at RDQ Economics. “On the plus side, however, we have seen a pickup in the measured savings rate, which makes it more likely that incremental gains in income will be spent.”

“From a supply-side perspective, we are encouraged by the pickup in entrepreneurial small business income, which coincided with improved readings on small business confidence,” the economists added. “Small business hiring is likely to be an important part of employment growth in 2012 and these readings are consistent with this thesis in our view.”

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