Cash continued to pour into municipal bond mutual funds last week as investors shrugged off a dip in the muni market and persisted in chasing relatively high tax-exempt yields.

Muni funds that report weekly figures attracted net inflows of $470.6 million during the week ended Jan. 21, AMG Data Services reported last week.

This was the third consecutive week of inflows following a 15-week drainage of cash from muni funds, according to the Arcata, Calif.-based fund tracker.

Municipal funds that report weekly have attracted a net $1.42 billion since Dec. 31. The $737.1 million funds attracted the previous week was the most since May.

The streak of inflows snaps a drought of nearly four months, during which the managed assets of all municipal funds - including those that report their figures monthly - shriveled 14.9%.

The return of cash flow into the funds initially followed a surge in the muni bond market that began last month.

Rampant buying lopped 1.4 percentage points off the yield on the 10-year triple-A muni between mid-December and mid-January, according to Municipal Market Data.

"We saw yields very attractive near the end of December," said Jeff Tjornehoj, a fund analyst at Lipper Inc. "Munis had been beaten down on several occasions and had yields that no matter how you sliced it looked very rich next to Treasuries. So that grabbed a lot of attention."

Cash continued to flood municipal bond funds last week in spite of a pullback in the market.

During the seven days measured in AMG's report, the yield on the 10-year shot up 18 basis points. The Bond Buyer 40-bond municipal bond index declined to 101.49 from 103.55.

Brad Durham, managing director at EPFR Global Fund Data, explained that muni bond performance and fund flows do not always move in tandem.

Sometimes, people move money in or out at a lag to the market's performance, Durham said. In fact, he added, it is not always clear whether fund flows follow market performance or vice-versa.

Evan Rourke, a portfolio manager with M.D. Sass, said even after the snapback, municipals sport yields that are attractive compared with other conservative investments, like Treasuries or federal agency bonds.

The 10-year triple-A muni last week yielded 117% of a 10-year Treasury. Until last year, the 10-year had never yielded more than its counterpart Treasury.

At 85%, the ratio of the 10-year triple-A muni yield to the yield on a 10-year Fannie Mae bond remains above the historical average of less than 78%, according to MMD.

"The absence of a credible alternative is encouraging people to put their money in munis," Rourke said.

Rourke said rates on comparably safe investments like money market funds are so low they are forcing people to look for better returns elsewhere.

According to bankrate.com, some banks are offering 0.01% on money-market funds. Money-market funds reported outflows of more than $19 billion last week, AMG reported.

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