Municipal bond mutual funds last week rebounded from a brief spell of cash leakage with the biggest influx of new money in four months.

Municipal funds that post their figures weekly reported $676.1 million in new money from investors during the week ended July 7, according to Lipper FMI.

Propelled by $1.28 billion of market gains last week, the municipal fund industry’s assets now exceed $500 billion for the first time.

This followed a $232.3 million outflow the previous week, which was just the third since the end of 2008.

All municipal funds, including those that report their figures monthly, have been posting inflows at a pace of $296.8 million a week, based on the four-week moving average.

Occasional hiccups notwithstanding, the municipal bond fund industry continues to command new cash, albeit at a slower pace than last year. Municipal funds gathered nearly $19 billion of new cash in the first half of 2010, according to the Investment Company Institute, compared with $29 billion in the first half of 2009 and an astounding $40 billion in the second half last year.

The industry has grown 46% since the end of 2008, fueled by nearly $100 billion of inflows and $55 billion of market gains, according to Lipper.

The impulsion behind the continuing river of money into the industry is not obvious.

The mainstream press is slamming state and local government credit almost on a daily basis, while the yield on a 10-year triple-A municipal bond is a puny 2.67%, based on the Municipal Market Data scale, the lowest yield since October and only 10 basis points above the all-time low.

Gene Gard, co-portfolio manager for eight state-specific mutual funds with $1.18 billion of assets at Dupree Funds, said he hears from plenty of investors worried about municipal credit who usually end up putting their money in municipals anyway.

Overpowering the concerns over budget gaps and shrunken revenues, Gard said, is an abject lack of sensible alternatives.

For those looking for less risk, money market funds yield all of 0.04%, according to iMoneyNet. A one-year bank certificate of deposit yields 1.34%, according to

For those looking for more return, stock markets have been on a stomach-churning roller coaster for most of this year. The Standard & Poor’s 500 Index has exhibited annualized volatility — or standard deviation of price changes — of 25% over the past 30 days.

“The alternatives people have are so poor right now,” he said. “It sure is hard to find yield out there right now.”

Dupree’s flagship fund, the $888 million Dupree Kentucky Tax-Free Income Series, yields 3.8%, which Gard said can make it challenging to tempt investors.

“It’s low, and people don’t like it,” he said. “But they like a 3.8% yield with us more than they do a 0.05% yield with a money market fund.”

Chris Mauro, municipal strategist at RBC Capital Markets, said the constant drumbeat of bad press over municipals has “at the very least become a distraction.”

While retail investors who rely on income from their investment portfolios have begun to resist low yields, Mauro said light issuance of new municipal bonds coupled with a flood of reinvested money from coupon and principal repayments at the beginning of this month have buoyed the market.



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