The global search for yield drove money into bank bonds and lifted safe-haven yields Friday.

The benchmark 10-year Treasury yield jumped nearly five basis points Friday to finish the week at 2.026%, its highest yield in two weeks.

Markit's CDX North America Investment Grade Index, a measure of health in the corporate-bond market, was on track to improve 1.2% to 106.5 basis points, which would be the lowest closing level since August 5, when it was at 103. A lower level indicates improving sentiment.

"We definitely saw risk appetite pick up globally," said John D. Ryan, portfolio manager at DWS Investments.

Ryan said Treasurys were sold as the "risk on" trade took hold of global investors who are seeing improvements in Europe's banking system and a better tone to the prospects for resolution in Greece.

"People definitely came into this year more bulled up," he said. "People are getting more comfortable that liquidity won't be a problem even if insolvency problems in Europe are unresolved."

High-grade municipal bonds--also viewed as safe-haven bets--took another beating, with some yields on the triple-A muni scale jumping 10 basis points for a second straight day, following a series of record-low yields earlier in the month, according to a benchmark scale kept by Thomson Reuters Municipal Market Data.

 
   Treasurys

Sapping demand for safe assets was optimism that a debt-swap deal, which could help avoid a potentially disorderly default by Greece, could be reached in the near term.

Adding to the punch, U.S. economic releases have largely removed fears of a recession in the world's largest economy, denting the need for the Federal Reserve to initiate a new bond-buying program to juice the economic recovery.

The Fed's first monetary-policy meeting of 2012 will take place next week.

"We don't doubt that at least some resolution to Greece and the creditors is a good thing in the sense it might have what would be a Euro crisis first--a resolution," said David Ader, head of government bond strategy at CRT Capital Group LLC.

Ader added that the Fed still leaves the door open for more monetary stimulus but, "without a heightened sense of urgency, the market may get a little impatient."

In late-afternoon trading, the benchmark 10-year note was 15/32 lower to yield 2.026%. The 30-year bond was 1 7/32 lower to yield 3.102%. Bond yields move inversely to their prices.

 
   Investment-Grade Corporates

Investors were snatching up bank bonds in the secondary market this week, pushing yields to multi-month lows as risk-perception in Europe subsides.

The appetite for certain bonds was staggering.

Bank of America Merrill Lynch (BAC) 6.25% coupon bonds due 2016 improved 95 basis points Friday, and 132 basis points in the week, which narrowed its spread to Treasurys to 530 basis points. The bonds now yield 6.185%, according to MarketAxess.

Among the most-actively traded bonds, results were more mixed and gains were less dramatic.

The bond changing hands the most on Friday was Goldman Sachs Group Inc.'s (GS) 5.75% coupon, 10-year bonds issued Thursday. Their spread to Treasurys improved 16 basis points to 364 Friday, versus 380 at issuance.

The multi-day rally was initiated by a non-event--the absence of a market selloff following the Standard & Poor's move last Friday to downgrade nine euro-zone countries. The move stripped France and Austria of triple-A ratings, and lowered Italy by two notches to BBB-plus from single-A.

"The expectation was that European markets would react negatively and they basically ignored it," said Mark Alexandridis, managing director of asset management at First Principles Capital. "All of these downgrades have been priced in. I don't think there was a soul on the planet who thought Italy was a single-A country last Thursday."

In the primary market, yields are so low that banks can offer a decent-sized concession to entice investors, yet still be enthused with the overall low borrowing cost.

"They are happy with the all-in yields, and we are happy with 20 to 30 basis point discounts to where things were trading," said Ryan from DWS.

One syndicate desk estimated the average new-issue concession--the extra yield offered to investors in the primary market--at nine basis points this week, in line with the eight-basis-point estimate from the week before, but well below the 26-basis-point estimate in the first week of the new year.

Yet just one borrower opted to take advantage of the favorable conditions in the primary market Friday, and no senior unsecured debt was on offer.

Bank of Nova Scotia (BNS, BNS.T) sold $2.5 billion of five-year covered bonds Friday, pricing the 1.95% coupon bonds to yield 1.977%, or 109.1 basis points over the Treasury rate.

That represents about 63 basis points in savings compared to Scotia's senior unsecured offering earlier this month, when it sold $1.25 billion of 2.55% coupon, five-year senior unsecured bonds priced to yield 2.593%, or 172 basis points over Treasurys. The Jan. 5 sale was part of a three-tranche, $2.75 billion offering rated Aa1 by Moody's Investors Service and AA-minus by S&P.

Covered bonds offer investors two layers of protection from default--the faith and credit of the issuer, like an unsecured corporate bond, as well as a portfolio of actively managed mortgages.

 
   Municipal Bonds

Prices of top-rated municipal bonds fell for a second straight day Friday, amid buyer resistance to low yields and as dealers unload inventory from some debt sales this week.

While 10- and 30-year muni benchmark yields fell 21 basis points and 42 basis points, respectively, from January 4 through Wednesday, in the last two days they gave back a lot.

According to MMD, yields on triple-A rated bonds rose as much as 10 basis points, with intermediate maturities seeing yields rise the most. Short-term prices were unchanged.

Munis have "outperformed other fixed-income classes year-to-date, and yields are really low," said Kathy Bramlage, director at Treasury Partners. "I don't want to buy here...supply is going to pick up, the economy is getting better and rates are going to go up from here."

Triple-A 10-year debt now yields 1.83%, compared to 1.67% Wednesday, an all-time low on MMD's scale. Triple-A 30-year debt yields 3.34%, versus 3.15% Wednesday, also an all-time low on MMD's scale.

Looking ahead, supply is "manageable" but picking up, Janney Montgomery Scott's Alan Schankel said in a research note. He expects $4 billion in supply next week, which is less than last year's weekly average of more than $5 billion. Meanwhile, 30-day visible supply is at $8.3 billion, the highest level in five weeks, he said.

According to Ipreo LLC's negotiated calendar, bigger deals next week include a $400 million water-and-sewer deal from JEA, the largest community-owned utility in Florida, and a $400 million offering from New York City's Municipal Water Financing Authority. The University of Chicago is also selling $524 million in taxable and tax-exempt debt in two parts.

 
   Mortgages

Credit Suisse on Friday lowered risk premiums on Redwood Trust Inc.'s (RWT) $405 million residential mortgage bond from levels discussed earlier this week, indicating strong demand for the rare private-label security, according to investors familiar with the deal.

The shorter-term, AAA-rated portion of the issue priced on Friday at about 190 basis points over an interest-rate benchmark, or 10 to 20 basis points less than levels floated to investors on Wednesday. Another longer-dated part sold at a yield spread of 230 basis points, also about 10 to 20 basis points less than anticipated.

Despite signs of investor demand, analysts don't expect growth in issuance of private-label mortgage bonds. The sector, whose failings helped to trigger the financial crisis, has been stunted by competition from government agencies Fannie Mae (FNMA) and Freddie Mac (FMCC), as well investors' lack of confidence in U.S. housing and regulatory reforms.

Several firms, including Two Harbors Investment Corp. (TWO), have intentions to issue bonds backed by prime mortgages too large for government agencies. Still, banks are able to originate and hold those jumbo loans at rates that undercut where private issuers can profitably securitize, analysts said.

An analysis of the 446 loans in the new Redwood security also suggests a narrow field of high-quality assets are required to get a AAA credit rating. The mortgages have an average loan-to-value ratio of 62.8%, meaning borrowers have substantial equity in their properties. They also have particularly good credit, as their average credit score is 770 on a scale from 300 to 850.

-By Patrick McGee, Dow Jones Newswires; 212-416-2382; patrick.mcgee@dowjones.com

--Kelly Nolan, Min Zeng, and Al Yoon contributed to this article.