Investors pulled cash out of municipal bond mutual funds last week for just the third time in a year and a half, despite a strong week for state and local government debt.

Municipal funds that report their figures weekly posted a net outflow of $232.3 million during the week ended June 30, according to Lipper FMI.

While the river of cash flooding municipal funds has ­markedly slowed this year, outflows remain rare. Investors had withdrawn money from municipal funds only twice before in 2010, on March 31 and April 14. Flows were positive every week in 2009 in the wake of a stream of ­outflows in late 2008.

All funds, including those that report their figures monthly, have been reporting inflows at a rate of $379 million a week for the past four weeks, based on the four-week moving average. The last time the four-week average was negative was January 2009.

Last week’s outflow is not easily explained, said George Strickland, who co-manages six municipal funds with more than $4 billion in assets for Thornburg Investment Management.

Munis had a solid week. Municipal bonds delivered a return of 0.5% for the week, according to the S&P National AMT-Free index, and the yield on the 10-year triple-A muni based on the Municipal Market Data scale sank 15 basis points.

Muni funds reported $1.31 billion in market gains during the week, propelling assets to a record $498.7 billion.

While retail demand had tailed off, Strickland said it has actually picked up again recently in spite of the low yields on municipal bonds. The 10-year muni yielded 2.76% late last week, according to MMD — 20 basis points above the all-time low set in September.

Jeffery Elswick, director of fixed income at Frost Investment Advisors, said he suspects investors have begun to balk at such low yields on municipals.

“There almost certainly becomes a point where investors start to pull a little bit of money out of bond funds just because of how low yields have gotten,” said Elswick, who helps manage two municipal funds with about $220 million in assets.

Elswick said clients have begun to worry what would happen to prices of bonds with such low yields if interest rates begin to rise. He said he would not be surprised to see flows to municipal funds continue to taper off.

Mutual funds became a more significant buying force last year.

Funds commanded $69 billion in new money from investors in 2009, which equalled nearly 17% of the total new municipal bond issuance in the year — the highest ratio of fund inflows to total primary bond offering since 1986.

Mutual fund inflows as a share of primary-market issuance so far in 2010 is closer to 10%.

Strickland pointed out that the latest weekly outflow comes during a time of very light supply. Municipalities floated $4.28 billion of debt last week, and are slated to sell $2.42 billion this week.

With Build America Bonds siphoning supply from the tax-exempt market and many people away for the July 4 holiday, Strickland does not see much chance of supply overwhelming demand this week.

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