Cash influxes into municipal bond mutual funds continued to accelerate last week as state and local government debt rallied amid an upsurge in the broader financial markets.

Investors entrusted $540.1 million to muni funds that report their figures weekly during the week ended March 25, according to AMG Data Services.

This was the 12th straight weekly inflow and the biggest since Feb. 18, according to the Arcata, Calif.-based fund tracker.

Muni funds have been cash-flow-positive for all of 2009 after closing out 2008 with 15 consecutive weekly outflows. Investors withdrew more than $10 billion from muni funds during that time.

Assets at all muni funds, including those that report their figures monthly, have rebounded to $365.56 billion. Assets shriveled as low as $337 billion in December, owing to outflows and almost $50 billion in market losses from September to December.

This week's report covers a period in which the Federal Reserve bolstered the muni market by pledging to buy $300 billion of Treasuries.

Yields on Treasury bonds plunged and muni yields soon followed. The yield on 10-year triple-A munis sank 26 basis points in two days, according to Municipal Market Data, although it has since ticked up five basis points.

The strength in munis came alongside rallies in many other markets. Stocks rose 3.5% during the seven days measured in this report.

A measure of volatility called the VIX, known as the "fear index," touched as low as 38.79 last week, the lowest since January. It has been lower only a handful of times since October.

Robert MacIntosh, chief economist and a muni portfolio manager at Eaton Vance, said a few recent economic reports "may show somewhat positive indicators that we may be nearing a bottom in economic activity."

New-home sales increased 4.7% last month and durable goods orders rose 3.4%, both exceeding economists' expectations.

"You may be able to look back at this period and say there were some signs the economy was beginning to bottom," MacIntosh said, though he cautioned he does not necessarily think that is the case.

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