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The municipal bond market remains very well bid, with torrid and unrelenting demand from retail and other clients supporting both low nominal yields and tight credit spreads, in particular within 15 years. Longer buyers remain a bit more diffident but still aggressive. We do note a dramatic increase in institutional gains taking last week that helped offset an overall softer tax-exempt new issue calendar, however, even Friday's pointed losses in the Treasury market were insufficient to budge long munis off their strong premium pricing.

Although trading opportunities remain in the municipal market, this is not a traders' market. Rather, income-oriented buyers (so called, going-away demand) has driven yields and credit spreads lower and lower as the scarcity of acceptable product continues to meet a growing need for safe, tax-exempt income.

Municipal bonds have performed well this year as buyers pursue the credit protection and income in both taxable and tax-exempt markets. Last week, munis rallied despite some flight to safety flows into Treasuries that in past weeks of the current crisis might have precipitated broader weakness. This year, investors appear to be more confident that the scarcity of high grade tax exempts will persist while the Federal government increases the income and capital gains tax rates and dilutes the value of competing tax shelters like the mortgage interest and charitable giving deductions.

With the Fed beginning what will likely be a slow road back to more normal intervention in the economy, Treasuries took a beating last week and municipal bonds saw sympathetic, if modest, losses across the yield curve. Still, this meant strong outperformance by tax-exempt paper that, with tax rates likely to go up and BAB-related scarcity likely to worsen or at least persist, may be setting the stage for record richness in tax-exempts over the next year.

Last week's extreme volatility in Treasury prices, equity prices, sovereign contagion and rescue, and employment generally swept by the municipal market. By not changing much, municipals were left appearing substantially cheaper versus Treasuries, and perhaps riskier versus the for-now bailed out European sovereigns.