The sell-off in municipal bonds finally appeared to sap some retail demand for state and local government debt last week as muni mutual funds reported taking in the paltriest amount of new money in six weeks.

Municipal bond mutual funds that report their figures weekly posted a net inflow of $638.2 million during the week ended Sept. 15, according to Lipper FMI, the lightest inflow since early August.

All muni mutual funds, including those that report their figures monthly, have been posting an average of $1.02 billion in new money from investors a week the past four weeks, still a very robust pace by historical standards.

The industry’s assets swelled last week to  a record $524.3 billion, representing growth of 5.1% since the end of June and 12.9% for the year.

The sector’s assets have grown 53.3% since the end of 2008.

Mutual funds at first were insulated from the moderate sell-off in municipal bonds that began earlier this month.

During the week ended Sept. 8, municipal bonds fell 0.5%, based on a Standard & Poor’s AMT-Free National Municipal Bond Index.

Mutual funds reported $932.6 million in new money that week, the third-heaviest inflow of the year.

Now flows appear to have caught up. The pullback in deposits into mutual funds coincides with a negative 0.14% return in munis last week, according to the Standard & Poor’s index.

The cold streak in the bond market is also hitting the values of the bonds mutual funds own. The industry reported $258.6 million in market losses last week.

Municipal bonds have flourished since the financial crisis as a climate of low interest rates, no appreciable inflation, tepid risk appetites, and expectations for higher taxes have sent yields on state and local government debt on an almost uninterrupted downward trajectory.

Yields reached record lows at every major maturity on the Municipal Market Data scale last month.

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