Investors poured the most money into municipal bond mutual funds in years last week amid a powerful rally in the tax-exempt market.

Muni funds that report their figures weekly reported an inflow of $1.13 billion during the week ended April 22, according to AMG Data Services.

That strengthens the trend of positive cash flow into muni funds, which have now attracted inflows for 17 straight weeks. Last week's inflow was the biggest since February 2006.

All muni funds, including those that report their figures monthly, have attracted $15.47 billion in inflows since the beginning of the year.

The inflows this year represent a turnabout from the drainage of cash from municipal funds at the end of 2008.

Assets at muni funds shriveled to as low as $336.94 billion in December from an all-time high of $397.55 billion in September. That reflected $9.09 billion in outflows and $49.46 billion in market losses during that 14-week period.

Total assets have now rebounded to $376.01 billion. Aside from inflows, this recovery reflects $18.23 billion in market appreciation, including a $4.09 billion increase last week.

The inflows and gains came amid a surge in muni prices, bolstered by the early success of the Build America Bonds program. The BAB program allows issuers to sell taxable debt, which takes some supply out of the tax-exempt market.

This helped drag the yield on the triple-A at the 30-year point of the Municipal Market Data curve to 4.35% Wednesday. The yield was at 4.93% on March 18.

The yield has plummeted 142 basis points since the Federal Reserve cut its benchmark interest rate to a range of zero to 0.25% on Dec. 16.

"People chase returns," said Jeffery Timlin, a portfolio manager at Sage Advisory Services. "They're reading what happened last quarter and making investment decisions based on historical data."

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.