Last week, investors did something they have not done in well more than a year: withdrew more money from municipal bond mutual funds than they put in.

Municipal funds reported a $187.2 million net outflow during the week ended March 31, according to Lipper FMI. This was the first net outflow since January 2009.

Based on the four-week moving average emphasized by Lipper, municipal funds are commanding cash from investors at the slowest pace in 15 months.

Anyone looking for a silver lining embedded in the latest number would have to dig pretty deep. The downturn was broad, with short-, intermediate-, and long-term flows all coming in far below their recent trends.

Further, the reversal appears confined to municipal funds. According to EPFR Global, bond funds overall had a stellar week, with emerging market, high-yield, and other U.S. taxable bond funds all reporting strong inflows.

Municipal funds, meanwhile, have clearly lost steam since their record-setting $77 billion cash intake last year.

The 590-fund, $470 billion municipal fund industry accumulated $14 billion in the first quarter of 2010. It commanded nearly $20 billion in the fourth quarter of 2009, and almost $27 billion in the third quarter.

Ron Schwartz, who manages more than $1 billion in municipal funds for RidgeWorth Capital Management, said some pullback was inevitable.

Since early 2009, a number of tailwinds have conspired to render short-term ­municipal bonds very expensive, Schwartz said.

Investors early last year grew intolerant of the negligible yields offered on money market funds, which are competing for scarce paper at minuscule yields thanks to the Federal Reserve’s campaign to keep interest rates kissing zero.

That sent a stampede of money scavenging for products offering safety, short maturities, and better returns than money funds.

Short-term municipal bond funds were a logical alternative, Schwartz said.

At the beginning of 2009, investors had less than $17 billion entrusted to short-term municipal bond funds. After the voluminous inflows of the past 15 months, they now have $47 billion invested with short-term funds, according to Lipper.

The avalanche of money into municipal industry coincided with dwindling supply.

The Build America Bonds program enacted under the stimulus legislation last year enabled state and local governments to float debt in the taxable market, often at lower overall borrowing costs.

That has siphoned supply out of the tax-exempt market.

Municipalities floated $100 billion of debt during the first quarter, according to Thomson Reuters, a 17% increase over the first quarter of 2009.

That is an incomplete description of the paper available to municipal bond mutual funds. Because of the sharp increase in taxable debt issued by municipalities, the supply of tax-exempt paper — which is what most municipal funds have to buy under their prospectuses — declined more than 19% in the first quarter.

The surge in demand coupled with the squeeze in supply sent yields on short-term municipal bonds plummeting.

The yield in five years on the triple-A general obligation scale last month sank to less than 60% of the yield on a five-year Treasury, based on the Municipal Market Data scale. The average since 1980 is 76%.

“Those ratios got extremely expensive,” Schwartz said.

It was only a matter of time before investors began to balk at such high prices, he said.

The drift up in Treasury yields probably “started the ball rolling” on the correction in municipals, Schwartz said.

It became difficult in the middle of last month to justify buying a two-year municipal yielding 0.55% as an alternative to cash when a virtually risk-free two-year Treasury yielded 0.95%.

“We saw Treasuries backing off and all of a sudden there’s no interest in munis,” Schwartz said.

The yield on the five-year triple-A muni has bloated 33 basis points in the past eight trading days.

The ascension in Treasury yields along with the sell-off in municipals has pushed the five-year muni-Treasury ratio back up to 65%, which Schwartz called “more realistic.”

In a report this week, George Friedlander, municipal strategist at Morgan Stanley Smith Barney, wrote he suspects the media hype over municipal credit deterioration has played a role in the “extremely sharp reversal” in the migration of cash to municipal funds.

“Recently, a string of articles has purported to show a nexus between budgetary pressures on state and local governments and credit risk appear to be taking a toll on investment decisions by potential fund investors, at least at the margin,” Friedlander said.

The cascade of cash coming out of money funds has not abated. According to the Investment Company Institute, investors have withdrawn nearly $17 billion from tax-free money funds in the past six weeks.

Tax-free money funds have coughed up $115 billion in the past year.