Investors kept pulling their cash from municipal bond mutual funds at a record pace last week as frightened money continued to flee the market.

Muni mutual funds that post figures weekly reported a $1.7 billion outflow for the week ended Jan. 5, according to Lipper FMI.

That exodus represents the eighth consecutive week in which funds saw more money go out than come in.

Among all funds, including those that report their figures monthly, the outflow was a staggering $6.72 billion — by far the most severe outward flood since Lipper started tracking this data almost 20 years ago.

Investors have yanked $23.3 billion from municipal bond mutual funds in the last eight weeks, reversing the previous eight months of inflows.

Funds have reported an average of $3.45 billion of outflows a week the past four weeks, shattering the prior record.

Before this latest exodus of cash, the record for a four-week moving average of outflows was $1.58 billion, in January 2000.

Tom Spalding, senior investment officer at Nuveen Investments, suspects that the first wave of outflows was comprised primarily of investors trying to lock in gains on their bond funds as interest rates crept up.

“Then maybe it fed on itself as redemptions begat lower prices,” he said.

Redemptions typically force mutual fund managers to sell bonds to raise cash for investors. And the sales have certainly begotten lower prices. The Standard & Poor’s index tracking total returns on municipal bonds is down 4.4% in the past three months.

Municipal bond mutual funds reported $2.03 billion in market losses on their holdings last week, and have posted $21.6 billion in losses since the end of ­September.

Mutual fund redemptions continue to hamper municipal bond values despite minimal supply coming to market. Municipalities sold only about $400 billion of bonds last week, according to Bond Buyer and Ipreo data. State and local governments sold a combined $2.5 billion in the last two weeks of December, according to Bloomberg LP.

With such light supply, one might expect a rally, but yields have actually increased the past three weeks.

At least one of the culprits is mutual fund redemptions.

“Our market is very retail-driven,” said Craig Brandon, a portfolio manager at Eaton Vance. “When retail sells bonds, or sells funds, that creates a demand for people to sell bonds and raise cash.”

Between market losses and outflows, the muni fund industry has shrunk by $43 billion, or 8.2%, to $484.1 billion since the beginning of the fourth quarter.

Many analysts agree that the incessant drumbeat of prognosticators foretelling of widespread municipal insolvencies has taken a toll on demand.

“Many clients of ours are nervous about it, and I’m sure we’re not the only ones,” said Michael Brooks, who manages the $5.57 billion Intermediate Diversified Portfolio at AllianceBernstein. “There’s plenty of scared money left in the market. I think there’s still going to be flows out because of all the headline risk.”

In a report last week, Bank of America Merrill Lynch municipal strategist John Hallacy wrote that he worries about the momentum in the stock market pulling money out of bonds.

Indeed, flow figures from the Investment Company Institute show equity funds attracting money the past few weeks as bond funds cough up mountains of cash.

The same ICI figures, though, suggest at least some of the money leaving bond funds is headed back to cash.

Tax-free money market funds have posted almost $10 billion in inflows the past three weeks, a figure that coincides somewhat with the $11 billion that’s left municipal funds during that time.

This migration pattern represents something of a silver lining for the muni industry, since tax-free money funds still invest in municipal products such as variable-rate demand obligations or short-term floating-rate notes — just not bonds.

Whether the money is going to stocks, tax-free money market funds, or elsewhere, it’s certainly not going to municipal bonds.

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