The tide of cash washing out of municipal bond mutual funds continued to ebb last week as more and more of the “hot money” that flooded the industry the last two years seems to have escaped by now.

Municipal bond mutual funds that report their figures weekly posted a net outflow of $973.9 million during the week ended Feb. 16, according to Lipper FMI. Though heavy by historical standards, this was the most benign outflow since the first week of December.

Four weeks of data now confirm the hypothesis that the worst of the outflows is behind the $464.6 billion muni fund industry. The weekly outflow peaked at $4 billion in mid-January, shattering the previous record.

Funds have now reported $38.7 billion in redemptions over the past 14 weeks, but outflows have been significantly below the near-term trend for a few weeks now.

Many fund managers regard the recent outflows as a partial reversal of the $101 billion of inflows recorded from the beginning of 2009 through October 2010.

The broad interpretation of these inflows is that they were “hot money” chasing yield at a time when Treasury rates were low, money market rates were even lower, and the stock market was too ­turbulent.

The regime has changed. Since the end of October, the 10-year Treasury yield has spiked more than 90 basis points, and the S&P 500 Index has gained 13.5%. That has coaxed money out of tax-free funds and into equities.

“Most of the hot money has left,” said Duane McAllister, who manages the $428 million Intermediate Tax-Free Fund, as well as a $382 million ultra-short fund, for Marshall Funds. “I think we’re going to continue to see modest redemptions on a going-forward basis.”

The moderation in outflows coincides with a more tranquil market.

The annualized 30-day volatility in 30-year triple-A municipal yields spiked to 27% in late December, according to Municipal Market Data — nearly five standard deviations from the historical average.

Volatility has since subsided to 13%, which is statistically within range of the historical mean.

While fund outflows played a big role in the recent volatility in the tax-exempt market, buying by crossover buyers such as hedge funds and life insurance companies reportedly has brought tax-free paper back to relative stability.

Minimal issuance of new bonds has helped, too. Municipalities sold just $20 billion of bonds through Feb. 11, according to Bloomberg LP, the lowest amount for this time of the year since at least 2003.

Preliminary numbers from the Investment Company Institute strongly support the notion that cash has left municipal funds in favor of equity and taxable bond funds.

Since the end of October, municipal funds have reported about $37 billion of outflows, based on the ICI numbers. Equity and taxable bond funds, meanwhile, have reported $39.5 billion of combined inflows.

“It’s not a coincidence that this asset shift occurred during a period in which the equity market has been climbing,” Chris Mauro, head of municipal strategy at RBC Capital Markets, wrote in a report last week.

Mauro rejects the notion that mutual funds are the “unambiguous barometer” of overall retail demand for municipal bonds. Citing trades reported through the Municipal Securities Rulemaking Board,

Mauro said “retail-sized” buy orders — which he defines as $1 million or less — actually outnumbered sell orders by a factor of almost two to one.

Figures reported from BondDesk show an even greater ratio of 2.5 to one, Mauro said.

In other words, private wealth is buying or at least hanging in while fickle mutual fund shareholders are selling.