Investors last week handed municipal bond mutual funds the puniest slug of cash in nine months as the cascade of new money continues to moderate.

Municipal mutual funds reported $473.6 million in new money from investors during the week ended Jan. 20, according to ­Lipper FMI. That is the lightest inflow since April of last year.

For much of 2009, low yields on money market funds drove investors out of cash and into short- and intermediate-term muni bond funds. Tax-free money funds bled more than $90 billion last year, according to the Investment Company Institute, while Lipper numbers show municipal bond mutual funds reported inflows of roughly $78.5 billion.

The exodus of cash from tax-free money funds remains fierce. With the average yield on a tax-free fund at just 0.02%, tax-exempt money funds have shed an average of nearly $2 billion a week for the past four weeks, according to iMoneyNet.

For the week ended Jan. 13, ICI reported money funds coughed up more than $9 billion, the heaviest outflow since the Primary Reserve Fund debacle in September 2008. Yet the cash landing in municipal bond mutual funds has slowed down considerably.

Muni funds have reported an average of $1.18 billion in inflows a week for the past four weeks. The four-week average was above $2 billion for much of September and October. For all of 2009, the average inflow was more than $1.5 billion.

“The massive influx of money into term muni mutual funds has consistently subsided since October,” Chris Holmes, municipal strategist at JPMorgan, wrote in a note to clients. The waning fund flows should not be interpreted as an erosion in confidence in municipals, he said.

Nobody thought the “trailblazing inflows last fall would be perpetual or sustainable,” he said. This moderation is what Holmes calls a normalization.

“In a nutshell, inflows have been declining but are still very strong from a historical perspective,” he said.

Tax-free money funds have exhibited peculiar behavior the past two weeks.

Tax-free money funds posted an $8 billion inflow during the week ended Jan. 6, the heftiest inflow in a year. Then during the week ending Jan. 13, they posted the biggest outflow in more than a year.

Christian Hviid, director of asset allocation at Genworth Financial Asset Management, explained why these massive flows did not manifest themselves in mutual fund flows.

Corporations often use tax-free money funds to set cash aside to pay bills they know are coming in a week or two.

It is common in early January to see a spike in tax-free money fund inflows as corporations stash their money to pay end-of-year expenses such as taxes, Hviid said. That is often followed by a commensurate outflow as the designated money is used to pay the bills. He said another factor that likely played a role is the coupon payments from municipal bonds, which often come in December.

Many people divert their coupon payments into tax-free money funds until they decide what they want to do with it, Hviid said. That results in the coupon payments landing in tax-free funds one week and escaping to its final destination the following week.

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