The tax-exempt market continued to gain Friday afternoon and many traders expect the firmer tone to continue into next week.

"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 stays firm and rallies, we could continue to quietly firm next week. You could see some underwriters coming in and clearing off the desk."

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

On Thursday, the 10-year Municipal Market Data yield dropped four basis points to 1.81% while the 30-year yield plummeted six basis points to 2.95%. The two-year closed at 0.29% for the 21st straight session.

The gains on Thursday pushed muni yields back down to levels not seen since August 14 when the 10-year closed at 1.80% and the 30-year finished at 2.95%.

Treasuries were stronger for the fourth consecutive session. The benchmark 10-year yield and the 30-year yield fell one basis point each to 1.66% and 2.78%. The two-year was steady at 0.28%.

Looking to next week, the municipal market can expect $1.55 billion to come to market, down significantly from this week's revised $6.31 billion. In the negotiated market, $1.27 billion is expected to price, down from this week's revised $4.93 billion. On the competitive calendar, $278 million is expected to be auctioned, down from this week's revised $1.38 billion.

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