The tide of money washing over municipal bond mutual funds eased up a touch last week.

Municipal funds that report their figures weekly posted an inflow of $1.41 billion during the week ended Sept. 30, according to Lipper FMI. That was the lightest inflow in three weeks.

The figure includes only funds that report weekly. Many funds report their inflows once a month. For this reason, Lipper considers the average weekly inflow over the past four weeks the best indicator of trends.

On this basis, flows have slowed down from the record.

Investors have been bestowing an average of $2.21 billion a week for the past four weeks on municipal funds. While this is far higher than anything prior to 2009, it is a slowdown from the previous week’s $2.7 billion-a-week pace.

Most analysts agree on what is driving this money into muni funds: interest rates paid on safe, short-term investments are too low.

The average tax-free money market fund yields just 0.09%, according to iMoneyNet.

The average one-year bank certificate of deposit yields 1.74%, according to, while the average savings account pays 1.15%.

Federal Reserve data show households have $7.76 trillion tied up in deposits like money market funds and bank accounts.

People have grown impatient of the bare-bones yields these types of vehicles pay, and are looking for places that can offer better returns.

“The retail investor who put money into their bank CDs a year ago, they’re rolling off and they’re looking at what the alternatives are right now, and they’re asking where can I find some yield?” said Phil Condon, head of municipal portfolio management at DWS Investments. “They’re putting it into munis.”

Many analysts have noted a consonance between municipal mutual fund inflows and tax-free money market fund outflows.

Muni funds have reaped $58.57 billion in new money from investors this year, compared with $68.81 billion drained from tax-free money funds.

Matt Fabian, managing director at Municipal Market Advisors, argues that the cash leaving tax-free money markets and landing in municipal mutual funds lately is establishing a correspondence of nearly one-to-one.

He constructed a chart showing cumulative inflows for mutual funds and outflows for tax-free money funds in 2009. It is almost symmetrical.

The wave of money flooding mutual funds this year has reshaped demand in the municipal market, helped yank yields down to historic lows, and exacerbated a shortage of tax-exempt paper.

Mutual funds are suddenly armed with tens of billions of dollars just as issuance of tax-exempt bonds is down 15.7% this year, according to Thomson Reuters.

Rich Ciccarone, head of research at McDonnell Investment Management, called these funds “captive” investors.

That means that when they collect new investor money, they cannot decide to take it to a different market, or even to leave it in cash. They have to buy tax-exempt municipals with it.

“There’s just not enough bonds for them, so it’s going to drive up the prices,” Ciccarone said.

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