NEW YORK  – The tax-exempt market is beginning to react to President Barack Obama’s budget proposal that came out Monday. Traders said munis are rallying on fears that taxes will be going up for the rich, forcing money into the tax-free market.

“There is a flight to safety,” a New York trader said, that is spilling over into munis from Treasuries. “With Obama’s budget, people are putting money into munis to avoid a higher tax rate. If he raises taxes on the rich, why not put money into tax free munis?”

Munis were steady across the board Tuesday morning, according to the Municipal Market Data scale.

On Monday, yields finished flat. The 10-year muni yield finished steady at 1.83% while the 30-year yield closed at 3.26%. For the fifth consecutive trading session, the two-year held steady at 0.29%, the record low set last Tuesday.

Treasuries were stronger. The benchmark 10-year yield and the 30-year yield fell three basis points each to 1.95% and 3.09%, respectively. The two-year was steady at 0.30%.

In the primary market, Bank of America Merrill Lynch is expected to price for retail $1.25 billion of Puerto Rico Aqueduct and Sewer Authority bonds, rated Baa2 by Moody’s Investors Service, BBB-minus by Standard & Poor’s, and BBB by Fitch Ratings.

Citi is expected to price for retail $830 million of Dormitory Authority of the State of New York third general resolution revenue state university bonds, rated AA-minus by Standard & Poor’s and Fitch.

Bank of America Merrill Lynch is also expected to price for retail $290 million of Virginia Commonwealth Transportation Board Garvees, rated Aa1 by Moody’s and AA by Standard & Poor’s.

“Without question, the value remains in new issues, which is where the majority are putting capital to work,” said Mark Cantrell, managing director of municipals at Piper Jaffray. “Until the market experiences a prolonged period of substantial supply, it is hard to imagine current yields cheapening very dramatically. Finding relative value has been and appears to remain challenging for the short term.

In the past week, muni-to-Treasury ratios have increased as munis underperformed Treasuries and became cheaper. On Friday, the 10-year ratio closed at 93.4%, up from 90.8% the previous week. The 30-year closed up to 104.8% from 102.2%. The five-year ratio fell significantly, closing down to 82.5% from 87.2% the previous week.

In economic news, January retail sales grew 0.4% after an unchanged December, the Commerce Department said. The gain was lower than the expected 0.7% predicted by economists.

“The lackluster headline gain in retail sales in January masks what promises to be a strong monthly increase in real consumer spending in January,” said economists at RDQ Economics. “We expect the momentum in sales to improve as job creation picks up in the first half of 2012.”

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