Investors once again entrusted money to municipal bond mutual funds last week after briefly withdrawing money for the first time in well over a year.

Weekly reporting municipal bond mutual funds posted net inflows of $416.8 million during the week ended April 7, according to Lipper FMI.

This followed an outflow of $413.7 million the previous week, the first net withdrawal in 65 weeks.

Funds are now commanding cash at a rate of $411.8 million a week, based on the four-week moving average — the slowest pace since January 2009.

The story lately has been a drop in flows to short-term funds.

The same hunt for yield that drove investors into short-term municipal bond funds throughout 2009 is now driving them out.

With yields on short-term municipals extraordinarily rich by historical measures, investors have begun to withdraw cash from short-term muni funds.

That has knocked out what had been a persistent source of cash that has helped support municipals since the beginning of 2009.

Some context: during the throes of panic in 2008, investors embarked on a widespread flight to safety.

Tax-free money market funds, which offer investors the equivalent of cash by investing in super-safe and super-short term municipal instruments, saw massive inflows, at one point bloating to more than $523 billion.

As the panic subsided, investors began to wonder why they were tolerating the minuscule returns money funds offered.

According to Crane Data, tax-free money funds on average offer a yield of just 0.04%.

Investors have been taking cash out of their money funds for well over a year. According to the Investment Company Institute, investors withdrew $92.8 billion from tax-free money funds in 2009, and an additional $32.4 billion so far this year.

Many fund managers say a primary impetus behind both the $78.6 billion in new money entrusted to municipal funds last year and the additional $15 billion this year has been investors looking to earn more than the zero returns on money funds while still staying safe and short.

A logical alternative was short-term municipal bond mutual funds.

Despite holding less than 5% of the municipal fund industry's assets at the beginning of 2009, short-term funds have commanded more than a quarter of the industry's inflows since then, according to Lipper.

Now, a five-year triple-A municipal bond yields 1.8% — or roughly 68.6% of the five-year Treasury.

That means an investor in the top tax bracket would pick up less than 10 basis points by selecting municipals over Treasuries.

"If you're in the five-year part of the curve, you're earning more than the money market but you're not earning much more," said Craig Brandon, who manages more than a dozen mutual funds for Eaton Vance. "That part of the curve is a very overvalued part of the curve."

It is difficult to say whether this is actually a trend, according to Brandon. It has only been a few weeks, and April is seasonally a slow month for flows because of tax season, anyway.

There is some chance, though, that investors are taking "baby steps" into higher-yielding products, he said.

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