(Bloomberg News) John Hirsch, 57, has been buying municipal bonds during the past four months, taking advantage of falling prices as muni mutual funds are forced to sell them to cover withdrawals.

"I have no interest in trading bonds," said Hirsch, a consultant to the medical industry in Clermont, Florida. "I'm going to hold until maturity, and at maturity I'll get the face value back."

Investors have withdrawn about $47 billion from U.S. municipal-bond mutual funds since November 10, pulling money for 24 weeks straight, according to Lipper US Fund Flows, a Denver-based research company. Retail investors purchased about $3 billion more in individual municipal bonds in the first quarter this year than in the same period last year, according to data on trades of $100,000 or less from the Municipal Securities Rulemaking Board, which regulates muni dealers.

Surging investor withdrawals force mutual-fund managers to sell in a falling market. Investment-grade muni bond prices have dropped 4.6% in the six months through April, as measured by the Bank of America Merrill Lynch Municipal Master Index.

"The people who are redeeming are the dumb money, because they're redeeming into a market where prices are down," said Alexandra Lebenthal, chief executive officer of New York-based Lebenthal & Co., which manages about $170 million in municipal- bond separately managed accounts. Her firm has received about $30 million in new money since December.

Muni Defaults

American households own $1.1 trillion of municipal debt, or about 37% of the market, and represent the largest holders, according to U.S. Federal Reserve data.

In December, Meredith Whitney, the bank analyst who correctly predicted Citigroup Inc.'s 2008 dividend cut, said on CBS Corp.'s "60 Minutes" there would be 50 to 100 "sizable" municipal-bond defaults.

Since July 2009 there have been 284 defaults on municipal bonds, representing about $8.9 billion of issuance or about 0.3% of the $2.9 trillion market, according to data from the Fed and Municipal Market Advisors, a research firm. Investment- grade municipal bonds had a cumulative 10-year default rate of 0.06% from 1970 to 2009, according to New York-based Moody's Investors Service.

Indiscriminate Selling