Municipal bond mutual funds just missed setting the record for assets under management last week as a tempered appetite for risk slowed the river of cash inundating the industry.

The pace of flows into muni funds last week slackened from record-demolishing to merely historically high.

Investors entrusted $761.8 million to muni funds that report their figures weekly during the week ended July 1, according to AMG Data Services.

This was the 57th-heaviest weekly inflow since 1992, according to AMG data spanning more than 900 weeks. It was also the lightest inflow in 11 weeks.

The last 10 weeks have provided some of the heaviest weekly inflows since AMG started keeping track.

These figures only include funds that report their figures weekly. AMG considers the four-week average of inflows for all muni funds, including those that report their figures monthly, more illustrative.

On that basis, funds are reporting inflows of $1.17 billion a week on average. Before this year, that would have been considered high - specifically, the seventh-highest ever.

This summer, though, it marks a slowdown.

The four-week average had smashed the record prior to 2009 for eight straight weeks, at its zenith reaching $1.83 billion the week ending June 10. The previous record was $1.37 billion in June 2008.

The latest four-week average represents a decline of 32% from the previous week's $1.7 billion four-week average.

In its weekly report, EPFR Global attributed the slowdown in fund flows to California, which said it plans to issue $3.2 billion of IOUs this month to creditors including vendors and recipients of tax refunds.

According to the Center on Budget and Policy Priorities, states collectively face an annual $166 billion budget gap.

Most states are likely to grapple with deficits in fiscal 2011 too, the think tank reported.

EPFR analyst Cameron Brandt pointed out that muni fund flows represented less than 30% of all flows into U.S. bond funds last week.

The share was greater than 60% when muni fund flows were at their fiercest in the spring.

The drop-off in muni fund flows comes as some investors are questioning the staying power of the rally that has propelled a variety of riskier markets since early March.

A barrel of oil cost about $64 yesterday, the cheapest price in five weeks. The Standard & Poor's 500 Index is down 5% in the past month.

The yield on the 10-year Treasury has plunged 42 basis points in the last month.

"Risk aversion, after declining appreciably for almost three straight months, has definitely hit a plateau," Brandt said. "The signals for a V-shaped recovery aren't as decided as people I think hoped."

During the period of declining risk aversion Brandt referred to, money cascaded out of safe havens like Treasury bonds and money-market funds and landed in higher-yielding, higher-risk investments.

This pushed an unparalleled sum of cash into the muni fund industry.

Muni funds attracted $31.96 billion from investors during the first half of 2009.

To put that into perspective, the fattest inflow over any 26-week period since the beginning of 1992 is $22.62 billion. That was last year.

In fact, the inflows over the last 26 weeks have exceeded every 52-week period since 1994.

The tidal wave of dollars flooding muni funds reached its high-water mark early last month. Muni funds reported inflows of $12.33 billion in the six weeks leading up to June 10.

In those six weeks alone, muni funds reported more inflows than they did from 1994 through 2004 combined.

The return of risk aversion checked fund flows enough to keep muni funds from setting a new mark for assets under management.

Muni funds have $397.12 billion in assets, representing a stunning growth rate of 16.2% since the beginning of the year.

That growth comes from $31.96 billion in inflows and $22.92 billion in market appreciation. It is shy of the $397.55 billion peak established in September.

Mark Pawlak, an analyst with Keefe, Bruyette & Woods, wrote in a report investors grew less tolerant of risk last week after the economy lost 467,000 jobs, which was more than expected and led to the highest unemployment rate since 1983.

The unemployment rate is 9.5%, up from 5.6% a year ago and 4.6% two years ago.

The KBW index tracking high-yield corporate bonds halved its weekly gain after the jobs report, Pawlak said.

Pawlak believes enthusiasm over "green shoots" pushed prices up and left them vulnerable to an economic recovery that is not as robust as people hoped for.

The Standard & Poor's 500 Index is still up 33% since March 9.

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