Retail demand for municipal bond mutual funds remained languid last week during one the toughest periods for state and local government debt this year.

Investors reporting their figures on a weekly basis entrusted $42.3 million to municipal funds during the week ended Nov. 10, somewhat of a rebound from the nearly negative $192,000 inflow recorded the previous week, according to Lipper FMI.

Those inflows compare with an average weekly tally of roughly $720 million earlier in the year.

All funds, including those that report their figures monthly, have reported an average of $392.6 million a week for the past four weeks, down from well more than $1 billion for much of 2009 and 2010.

According to the Investment Company Institute, municipal funds posted $30.29 billion of inflows the first three quarters. Flows were on pace for the second-strongest year ever after last year’s $69 billion haul, but the velocity has since slowed significantly.

In a note to clients, Chris Holmes, an analyst with JPMorgan, blamed three factors.

One is seasonal slowness. According to ICI data, only 6% of muni fund flows come in the fourth quarter. Three of the slowest four months for fund flows are in the fourth quarter. December is by far the slowest month.

The second factor is low yields on municipal bonds, according to Holmes.

Lastly, the outflows from money market funds — which have consistently fed new money to mutual funds for the better part of two years — may have moderated somewhat.

Retail investors have pulled back on their deposits into municipal bond mutual funds just as the market is struggling with a mountain of new supply to absorb.

Bloomberg LP lists more than $20 billion of municipal bonds for sale over the next 30 days.

Over-supply has catapulted yields on municipal bonds higher this month.

The yield on a triple-A 10-year municipal bond spiked 11 basis points this month, according to Municipal Market Data.

Supply concerns have hammered the long end in particular, with the 30-year triple-A yield vaulting 31 basis points in November.

The Standard & Poor’s index tracking total returns on tax-free municipal bonds slipped almost a full percentage point the first seven trading days of the month, an uncommonly sharp sell-off in the muni market. The last time municipal bonds weakened by more than that over a seven-day period was June 2009.

As a result of the poor performance, the $524.4 billion municipal bond mutual fund industry posted a $3.5 billion loss in market value on its holdings for the week. That is the biggest mark-down in a year and the third biggest of any week since Lipper started tracking the data in the early 1990s.

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