Cash continues flooding into municipal bond mutual funds as retail investors embrace yields many once scorned as being far too low.

Municipal bond mutual funds that report their figures weekly posted a net inflow of $927.1 million during the week ended Aug. 18, according to Lipper FMI.

All funds, including those that report their figures monthly, have reported an average of $1.14 billion in new money from investors the past four weeks — the most robust pace of inflows since early March.

The combination of $25.9 billion in new money and $22.9 billion in market gains this year has expanded the industry's assets by 10.8% in 2010, to a record $514.85 billion.

"Bonds are hot right now," said Josh Gonze, who co-manages six municipal bond mutual funds with $4.62 billion in assets for Thornburg Investment Management.

Retail demand for municipal bond mutual funds has revived from a three-month lull that began in April.

Inflows were strong in the first quarter of 2010, but the tide of new money began to slow in the second quarter. Funds reported less than $1 billion in new money in April, the weakest inflow since 2008, according to the Investment Company Institute. May and June were also tame by recent standards.

Muni funds reported nearly $4 billion in inflows in July, based on preliminary data from the ICI. Inflows continued to build in the first half of August to levels reminiscent of last year's record pace. Investors entrusted $69 billion to municipal funds, ICI says.

Lipper's four-week moving average of flows bottomed in early July and spiked in the following weeks.

Before the record-setting inflows last year, the current pace of new money was matched only twice before: once in 1993 and once in 2008.

The stream of money into fixed income is by no means limited to municipals. Overall, bond funds — which manage $2.6 trillion — have reported at least $7 billion in new money each of the past four weeks. Meanwhile, equity funds have been hemorrhaging money since May.

Gonze said the primary impetus is the absence of inflation from the market's psyche.

The consumer price index excluding food and energy is increasing at a rate of less than 1% annually.

Trading in interest rate futures contracts now indicates zero likelihood the Federal Reserve will raise its benchmark interest rate target this year, according to Bloomberg LP. As recently as May, these futures indicated more than a 50-50 chance of a hike.

Futures now indicate only a 25% chance of a rate hike by the middle of 2011.

Expectations for a protracted period of low interest rates have been priced into the bond market. The yield on the five-year Treasury has collapsed 125 basis points in 2010.

"The flows continue to be into bond funds as a broad theme," said Greg Kurek, client portfolio manager in the fixed-income and currencies group at JPMorgan Asset Management. "There's just a real demand for the asset class."

JPMorgan runs 11 municipal mutual funds with $14 billion in assets.

Kurek said the volatility that struck markets in early May precipitated an inflection point, where investors capitulated to yields at historic lows.

In April, retail investors began to resist municipal yields flirting with or in some cases breaching historic lows. But the Greek sovereign debt crisis and the subsequent fallout in financial markets frightened them back into safe fixed-income products, according to Kurek.

As a consequence of those events, the traditional push-back against low yields on municipal funds has ebbed, he said.

"People are starving for yield so they're going to push the envelope," Kurek said. "As low as [muni] rates are, they probably can go lower."

In his daily commentary Friday, Thomson Reuters analyst Randy Smolik compared the yen for higher rates among muni investors to "being caught on a one-way highway where the next exit is over 100 miles away."