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Investors Continue Muni Fund Exodus

NEW YORK (TheStreet) -- The municipal bond sell-off continued last week, with investors pulling $5.75 billion out of such funds, according to data released on Wednesday.

The Investment Company Institute, which tracks flows in long-term mutual funds, said that investors put a net $4 billion into the market during the week ended Jan. 19. $4.6 billion of that went toward stocks, $3.6 billion went toward taxable bonds and $1.6 billion went into hybrid bond-and-equity funds.

Municipal bonds was the only category from which investors withdrew money. Investors have removed $30.5 billion from municipal-bond mutual funds since the start of November, when concerns about local budgets started gaining traction.

The sell-off has been attributed to comments by well-known financial analyst Meredith Whitney after she predicted in September that dozens of municipalities would default on hundreds of billions of outstanding bonds this year.

Whitney isn't alone. As municipal budget issues have piled up - and speculation over states' creditworthiness has increased - JPMorgan Chase (JPM) CEO Jamie Dimon also warned investors to be "very, very careful" dabbling in muni bonds. George Soros said on CNBC this week that municipalities' budgets will be the "drama of the next year." And months ago, Berkshire Hathaway's (BRK-B) CEO Warren Buffett also warned of a "terrible problem" for municipal bonds over the long term.

But not everyone agrees that the muni-bond market is a mess. Prominent bond fund managers, including PIMCO's Bill Gross, have disputed Whitney's analysis.

A blogger known as Bond Girl picked apart Whitney's analysis on Wednesday, pointing out, for instance, that the 100 largest county and city issuers don't have even $100 billion in debt outstanding. The trade publication Bond Buyer notes that as retail investors flee the muni-bond market, other "smart money" buyers are seeing opportunities in top-quality bonds with impressive yields.

Nonetheless, equities have been a clear winner over the past six months as the retail masses flocked from one investment to another.

While the iShares S&P AMT-Free Municipal Bond Fund (MUB) and SPDR Nuveen Barclays Capital Municipal Bond ETF (TFI) have lost 6% to 9% over the past six months, the S&P 500 Index has climbed more than 16%. The Dow Jones Industrial Average broke through 12,000 for the first time since 2008 on Wednesday.

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