Redemptions of single-state municipal bond funds soared 92.3% in October to $1.65 billion from $856 million in October 1993, according to the Investment Company Institute.
The October redemption rate was exceeded this year only in March, when state fund redemptions rose 108.9%.
Redemptions of long-term municipal bond funds rose 63.8% in October, to $3.72 billion from $2.27 billion in October 1993.
Meanwhile, sales of stock and bond mutual funds totaled $32.2 billion in October, down from $45.7 billion in October 1993. The figure comprises new money into funds, including reinvested dividends.
As sales of long-term mutual funds slide, cautious investors have been moving cash into money market funds.
For example, assets of tax-exempt money market funds increased by $281.7 million to $115.4 billion in the week ended Nov. 21, according to IBC/Donoghue's Money Fund Report.
Executives at Fidelity Investments concur that cash has been flowing into its money market funds.
"The flow into money market funds has been significant," a Fidelity spokeswoman said.
At the Benham Group in California, some money that has flowed out of long-term municipal funds has moved into the taxable sector, a portfolio manager said.
"We've seen tremendous inflows into our taxable money market funds," said Dave MacEwen, a portfolio manager. "We've seen some of that flow into tax-exempts."
MacEwen estimated that in November, Benham's tax-exempt money market funds gained about $10 million in assets, approximately one-third of the amount redeemed from its long-term municipal funds.
Analysts attribute the huge October redemptions to rising interest rates that have wreaked havoc on mutual funds' net asset values.
November and December redemption data are expected to continue to show strong outflows, as investors take losses for tax purposes, analysts said.
"Unless there's a major rally going forward, this can be worse than 1987 for bond investors," based on the percentage change on interest rates and portfolio losses, said Richard A. Ciccarone, head of tax-exempt fixed-income research at Kemper Securities Inc.
"The redemptions have hit hard this year because we haven't had a reprieve," Ciccarone said.