The $3.7 trillion U.S. municipal bond market closed out the year on a positive note on Friday with some yields hitting record lows after munis posted the best performance of all fixed-income classes in 2011.

In a shortened trading session before the New Year holiday, prices of top-quality munis ended mostly higher, continuing to push some yields to record lows, according to a final market read by Municipal Market Data, a unit of Thomson Reuters.

Yields on AAA-rated 10-year muni bonds fell 3 basis points to 1.83 percent, setting a record low for a second straight day. On Thursday, the yield fell to a low of 1.86 percent on MMD's scale.

Since Dec. 1, yields on the 10-year have fallen almost 40 basis points. On Dec. 30, 2010, 10-year yields stood at 3.16 percent.

Yields on triple-A-rated 30-year munis fell 1 basis point to 3.55 percent, according to MMD.

The record-low yield for the 30-year maturity is 3.44 percent, hit on Sept. 22. Since Dec. 1, yields on the 30-year have dropped by more than 30 basis points; one year ago 30-year yields were at 4.68 percent.

Yields have fallen as new issue muni supply declined to a 10-year low. Muni debt sales dropped 33.6 percent in 2011 to $283 billion — the lowest since 2001 — from 2010's nearly $427 billion, according to Thomson Reuters data.

The decrease in yields triggered bond refundings totaling $138.7 billion, or nearly 49 percent of total issuance this year, the data showed.

Next year, long-term U.S. taxable and tax-exempt municipal bond issuance is forecast to total $347 billion, according to a survey by the Securities Industry and Financial Markets Association. Total muni issuance, which includes short-term debt, is predicted to hit $402 billion in 2012.

In 2011, taxable Build America Bonds, or BABs, and tax-exempt munis outperformed all other fixed-income asset classes, according to BofA Merrill Lynch Global Research.

BABs led the way with a total return of 20.317 percent, followed by tax-free bonds at 9.995 percent. This compared with Treasuries' and agencies' return of 8.514 percent, corporate bonds at 6.57 percent and mortgage bonds at 5.803 percent, the report said.

In the week ended Dec. 28, municipal bond funds posted almost $362 million of net inflows, according to Lipper data. In the previous week, muni funds inflows were about $765 million.

The four-week moving average remained positive at around $656 million, according to Lipper, a unit of Thomson Reuters.

High-yield muni funds recorded inflows of $19 million while exchange-traded muni fund inflows were $2 million.

BondDesk data for the week ended Dec. 28 showed retail investors' appetite for individual munis remained strong as they bought 2.5 bonds for each one they sold, even in a holiday week with scant supply. The buy/sell ratio slipped from 2.6 in the previous week.

The total number of bonds bought was 42,258, while the total number of bonds sold was 16,652. That compares with the previous week's buys of 74,745 and sells of 29,241. The data is based on odd-lot customer transactions of under 100 bonds.

On Thursday, the Investment Company Institute reported inflows to muni funds for the 16th week in a row. Tax-free funds had inflows of $1.189 billion in the week ended Dec. 21, compared with inflows of $861 million in the previous week, said ICI, a mutual fund trade organization.

Next week, muni bond sales are expected to total only about $517 million, down from an estimated $3.72 billion this week, according to preliminary estimates by Reuters.

Negotiated deals will total $190.2 million, while competitively bid sales are expected to total $326.2 million.

The muni market will be closed on Monday for the New Year holiday; it will reopen on Tuesday.