Investors continued to ferry cash out of their municipal bond mutual funds at historic rates last week as a tumultuous sell-off sowed fear among buyers.

Mutual funds that report their figures weekly posted a net outflow of $2.73 billion for the week ended Dec. 15, according to Lipper FMI. It was the fifth-consecutive weekly outflow for municipal funds.

Redemptions from municipal funds lately have forced portfolio managers to sell bonds to raise cash, contributing to the drubbing for municipals, which has pushed the yield on a benchmark triple-A 10-year muni bond up 63 basis points since Nov. 10 — when the drain began.

The four-week moving average for the period ended Dec. 15 for all municipal funds, including those that report their figures monthly, was a nearly unprecedented loss of $2.3 billion. That’s the second-highest tally ever recorded. The record was set by the four-week period that ended Dec. 8.

“There is no doubt that the demand side of the market has weakened,” according to R.J. Gallo, a portfolio manager at Federated Investors.

Everyone is aware of the additional supply that will be dumped into the long end of the tax-exempt markets as the Build America Bond program approaches its Dec. 31 expiration date, according to Gallo.

That prospect — and the volatility it’s expected to produce — might be motivating financial advisers to suggest their clients move out of municipal bond funds, he said.

Muni bonds returned negative 1.7% during the seven days measured in the latest Lipper report, according to a Standard & Poor’s index, and are down 5% since the end of October.

The $494.4 billion municipal bond mutual fund industry reported $5.4 billion in market losses on its holdings last week, following a $7 billion loss the previous week.

Between outflows and market losses, muni funds are losing assets fast.

Since the industry peaked at $527.8 billion on Oct. 20, it has bled $33.38 billion, or 6.4% of its assets.

Mutual funds, which own more than 17% of all municipal bonds, have been transformed from a support for munis into a depressant.

For all of 2009 and much of 2010, mutual funds were awash in cash, and soaked up a robust amount of new issuance coming to market.

Municipal bond mutual funds reported a record $69 billion in new money from investors last year, according to the Investment Company Institute. That represented 16.9% of new issuance last year, the highest ratio of mutual fund flows to new muni issuance since 1986.

The first 10 months of this year, investors entrusted an additional $32.2 billion to municipal bond mutual funds, or 10% of issuance during that period.

Inflows abruptly reversed to outflows in mid-November. Funds have now reported $12.3 billion in outflows the past five weeks, as well as $17.9 billion in market losses.

“As we have seen repeatedly, the price trajectory of the market can either beckon or frighten individual investors,” John Dillon, a municipal bond strategist at Morgan Stanley Smith Barney, wrote in a report. “The fourth quarter was no exception.”

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