The tax-exempt market opened with solid gains Monday morning, extending last week's rally. Prices were higher with Treasuries after Larry Summers, considered the front-runner to replace Ben Bernanke as the chairman of the Federal Reserve, withdrew his name from consideration.

The bond markets saw this as a positive and Treasuries rallied across the curve. The benchmark 10-year yield fell 10 basis points to 2.79%. The two-year and 30-year yields slid five basis points each to 0.39% and 3.79%, respectively.

Munis followed. "It's a Summers rally in the fall," one New York trader quipped.

Stronger Treasuries and a light new-issue calendar also helped to support prices. "The tone is clearly on the Fed and Summers' stepping back is a positive for the market," a second New York trader said. "The calendar is manageable and refinancings have been scaled back a lot given the recent increase in rates."

Still, this trader was cautious given that outflows from municipal bond funds continued for the 16th consecutive week. "Although direct retail buying has picked up, there are bond outflows. People are keeping an eye on that. Muni-to-Treasury ratios have dropped a bit but the concern is about the demand side."

In the primary market Monday, JPMorgan is expected to price for retail $130 million of Colorado Springs, Colo., Utilities System improvement revenue bonds. The issue is comprised of two series, $59.82 million and $70.22 million. The bonds are rated Aa2 by Moody's Investors Service and AA by Standard & Poor's and Fitch Ratings.

The deal Monday kicks off a week of light supply as issuers wait for Wednesday's Federal Open Market Committee meeting announcement for direction. The market can expect $3.51 billion in new issues, down from last week's revised $5.91 billion. The negotiated market can expect $2.10 billion followed by $1.40 billion in competitive auctions.

On Friday, yields on the triple-A Municipal Market Data scale ended as much as five basis points firmer. The 10-year yield slipped four basis points to 2.83% and the 30-year yield dropped two basis points to 4.39%. The two-year was steady at 0.43% for the 42nd straight session.

Yields on the Municipal Market Advisors scale also ended as much as five basis points lower. The 10-year yield dropped four basis points to 3.00% and the 30-year yield dropped three basis points to 4.49%. The two-year closed unchanged at 0.55% for the 21st session.

In economic news, industrial production rose 0.4% in August after an unchanged reading in July while capacity use rose to 77.8% from 77.6% in July. Both figures matched economists' expectations.

"We believe that growth in the manufacturing sector is picking up and will run faster over the balance of the year than has been the case in recent months," wrote economists at RDQ Economics. "However, the stronger-than-expected gain in manufactured output in August has to have set against it the downward revision to July's output. The result is that the three-month gain in manufactured output, at 2.6%, is exactly in line with the gain seen over the last year and does not yet support our thesis of strengthening growth."

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