The tremendous sums of cash landing in municipal bond mutual funds have started hitting longer-term funds as investors reach for better yields and feel more comfortable with the outlook for inflation.

Muni funds once again broke the record for the pace of cash inflows from investors last week, according to AMG Data Services.

Muni funds that report their figures weekly posted an inflow of $1.51 billion during the week ended Aug. 26. That broke the previous record of $1.47 billion set in February 2006.

That figure only includes funds that report their figures weekly. Some funds, representing more than a third of the industry's assets, report their figures once a month. For this reason, AMG Data considers the four-week average of flows the best description of trends, because it includes every fund.

On this basis, funds are attracting $2.33 billion in cash a week, which is a new zenith and more than double the record prior to last year.

Investors have entrusted $46.38 billion to municipal funds in 2009. The industry's assets have grown 22% this year, to $418.52 billion.

Fund managers and analysts have attributed the tidal wave of money hitting the industry to several factors, including expectations of higher taxes, a preference for the relative security of local government credit, and impatience with minuscule yields on safe havens like money market funds.

Earlier this year, short-term muni funds were the biggest beneficiaries of these trends. Short-term funds represented a logical stopover for money that had grown bored in money market funds but was still too timid for longer-term bets, fund managers said.

The result: short-term funds went from posting an average weekly inflow of $181.4 million in mid-January to $836.7 million today.

The short-term fund sector's assets under management have almost doubled this year, to $32.82 billion.

In early February, a little more than 20% of the industry's flows landed in short-term funds. By last month, the share had spiked to 47.8%. This meant a sector with less than 8% of the industry's assets was garnering almost half the weekly inflows.

The irony of the flows is that they came just as yields on short-term munis were the least alluring they had ever been.

Earlier this month, the two-year triple-A muni, based on the Municipal Market Data scale, yielded 51.9% of the two-year Treasury, the most unattractive yield ever recorded.

The 30-year triple-A, by comparison, yields more than its corresponding Treasury. Many analysts said the better value was in longer-term municipals, if investors could stomach the risk.

In one of his daily commentaries last week, Thomson Reuters analyst Randy Smolik asserted that the value in long-term munis "has been hanging on the vine like ripe fruit ready to be picked."

Investors have noticed. Intermediate- and long-term funds have begun commanding a greater share of the sector's flows, AMG Data's figures show.

Last week, intermediate and long funds combined for a 64% share of the four-week average of flows, compared with 52.2% in early July.

Since the beginning of July, the four-week average of flows has more than doubled for both intermediate and long funds.

In its weekly report, EPFR Global, which provides fund flows and asset allocation data to financial institutions, wrote that inflationary fears have continued to ebb, coaxing money out of short and inflation-protected funds and into longer-term assets.

Ten-year Treasury bonds whose principal adjusts with inflation yielded 175 basis points less than nominal 10-year Treasuries yesterday, according to Bloomberg LP, implying an average inflation rate of 1.75% over the next 10 years. That is down from yields implying inflation of more than 2% earlier this month.

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