Cash continued flooding municipal bond mutual funds last week as a growing appetite for mild risk continued bolstering the muni market.

Investors entrusted another $710.9 million to municipal funds that report their figures weekly during the week ended Feb. 11, according to AMG Data Services.

That was the sixth consecutive weekly inflow following a 15-week drainage of cash at the end of 2008.

Muni funds have attracted $3.17 billion in cash since the beginning of the year. The previous week's cash influx of $758.2 million was the heaviest since May.

Total assets at all municipal funds - including those that report their figures monthly - have recovered to $363.85 billion from $336.94 billion before the rally in munis began in mid-December. That recovery reflects both cash inflows and market appreciation.

Since Dec. 15, the yield on 10-year triple-A rated munis has compressed nearly 140 basis points, according to Municipal Market Data.

The surge in municipals has even begun propping up high-yield and long-term bonds. The yield on 30-year, Baa-rated munis has shrunk to 6.94% from 7.91% in mid-December, according to MMD.

Ben Thompson, a portfolio manager at Samson Capital Advisors, said munis have benefited from a shift in investors' risk tolerance from "extreme risk aversion" toward "moderate risk aversion."

That represents something of a sweet spot for high-grade municipals, Thompson said, because they are still high quality and a logical target for investors looking for better yield than Treasuries without taking much risk.

At the height of the credit crisis, investors had almost no stomach for any kind of risk. Investors dumped stocks, corporate bonds, and munis in favor of ultra-safe Treasury debt. The yield on the 10-year Treasury collapsed from 4% in mid-October to barely more than 2% in mid-December.

That risk aversion has moderated. The yield on the 10-year Treasury crept up to 2.9% in trading late Friday.

"In the fourth quarter, we had an environment of extreme risk-aversion," Thompson said. "We've seen the reversal of that to some extent over the last six weeks."

He said the specter of support from the federal government has also helped the market. In fact, he believes it has helped bond prices in an unforeseen way.

Many municipalities are waiting for clearer details about the stimulus plan before issuing bonds, according to Thompson. That, he said, has kept new supply off the market, fortifying prices on existing bonds.

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