The flow of cash into municipal bond mutual funds slowed down another notch last week.

Investors entrusted $605.6 million to municipal funds that report their figures weekly during the week ended March 17, according to Lipper FMI.

The latest flow is further evidence of the general downward trend that began when flows peaked last year.

At the height in October, all funds — including those that report their figures monthly — were reporting inflows at a rate of $2.89 billion a week, based on the four-week moving average.

That was far and away a record. The highest four-week moving average prior to 2009 was $1.37 billion.

The four-week average has since drifted down, and last week was at $1.1 billion — still high by historical standards but no longer record-shattering.

Cash keeps finding its way into municipal funds despite traditional measures of value showing municipals are rich.

The 10-year triple-A muni yields 77% of the 10-year Treasury, according to Municipal Market Data, just a few percentage points higher than the decade-low set late in the third quarter of 2009.

The average ratio since 2000 is 87.5%.

Chris Johns, who manages a $270 million tax-free Colorado fund for Aquila Group of Funds, said the squeeze in supply is mostly what is driving municipal prices.

Between the collapse of the insurance industry and the seepage of issuance into the taxable market through the Build America Bonds program, the volume of new tax-exempt bonds sold plunged nearly 16% in the first two months of 2010, according to Thomson Reuters.

The muni-Treasury valuation is ­particularly rich at the short end of the yield curve. The one-year municipal yield is two-thirds of the one-year Treasury yield, compared with the 81% average since 2000.

This might explain the sharp drop in flows last week to short-term funds, which manage about 10% of the municipal fund industry’s $483.6 billion in assets.

The four-week average of flows to short-term funds dropped to $219.3 million last week, the lightest flow since January 2009.

Wherever short-term investors are taking their money, it is certainly not to money market funds.

According to the Investment Company Institute, investors withdrew a whopping $73.7 billion from money funds during the week ended March 17. Tax-free money funds shed $3.28 billion, after coughing up $5.05 billion the previous week.

Johns said he has avoided buying ­short-term municipals because the ratios are so low.

Johns called short-term muni prices “very, very high,” and ascribed the demand to investors looking for safe paper who are fed up with the minuscule yields on money market funds.

The average tax-free money fund yields 0.02%, according to iMoneyNet.

Johns prefers to stay mainly in the 12-to-18-year range for now.

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