The tax-exempt market continued its buying spree this week as increased supply over the past few weeks has not forced sellers to take concessions.

"Munis keep on trucking," a Chicago trader said. "Everyone freaked out after QE3, but the Fed told us rates are staying low and they aren't going anywhere. So I think what we saw this week was people accepting that we are here for a long time and rates are staying low."

He added demand has been very strong the past two weeks. "We saw over $8 billion and then $7 billion and everyone is gobbling up new issues. Usually with that supply you see concessions but deals were five to 10 times oversubscribed. You don't even see supply it's just gone."

On Thursday, the 10-year and 30-year Municipal Market Data yields fell two basis points each to 1.71% and 2.88%, respectively. The two-year closed flat for the third session at 0.30%.

Since the most recent rally streak began Sept. 17, the 10-year MMD yield has plunged 22 basis points from 1.93% while the 30-year yield has plummeted 18 basis points from the 3.06% where it traded on Sept. 17.

The 10-year yield is now at its lowest since Aug. 6 when it last touched 1.71%. It hovers only 11 basis points above its record low of 1.60% set July 26.

The 30-year yield is at its lowest since Aug. 6 when it yielded 2.87%, just nine basis points above its 2.79% record low yield hit July 25.

Treasuries rallied Friday morning. The benchmark 10-year yield and the 30-year yield dropped three basis points each to 1.61% and 2.79%, respectively. The two-year yield fell one basis point to 0.24%.

In economic news, personal income rose $15 billion, or 0.1%, in August, coming just short of the 0.2% gain expected by economists.

Personal spending climbed $57.2 billion, or 0.5%, in August - the largest increase since February's 0.8% jump, and on par with economist expectations.

"Not surprisingly income and spending trends by the household sector remained lackluster in the third quarter," wrote economists at RDQ Economics. "Although an increase in nominal spending of 0.5% is not too shabby on the face of it, four-fifths of the gain was absorbed by higher inflation as inflation jumped in August, which resulted in a mere 0.1% increase in spending in real terms."

They added, "With tax increases approaching, households are not in a strong position to absorb the tax increases slated to kick in on Jan. 1, 2013, unless the Congress and the president take action on the fiscal cliff."

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