After weakening Friday morning, the tax-exempt market started to regain some losses in the afternoon trading session, though traders noted activity dropped off significantly after lunch.

"I think for the day we could end flat," a Virginia trader said. "Early in the morning things were softer, and then there was weak housing data and the Treasury market took off. But the muni market after lunch is just another quiet summer Friday."

And while the supply calendar looks light next week with only about $4.5 billion, outflows from muni bond funds continue to plague the market. "Outflows are pumping paper back into the market even though the supply calendar looks manageable," this trader said.

Thursday, yields on the triple-A Municipal Market Data scale ended as much as two basis points higher. The 10-year yield increased one basis point to 2.94% and the 30-year yield rose two basis points to 4.46%. The two-year finished flat at 0.43% for the 27th straight session.

Yields on the Municipal Market Advisors scale ended as much as two basis points higher. The 10-year yield rose two basis points to 3.09% and the 30-year yield increased one basis point to 4.55%. The two-year was flat at 0.55% for the sixth session.

Treasuries continued to rally Friday afternoon. The benchmark 10-year and 30-year yields slipped eight basis points each to 2.82% and 3.80%, respectively. The two-year yield fell one basis point to 0.39%.

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