Municipal bond investors are looking for safe alternatives both inside and outside that market after Detroit filed for bankruptcy July 18.

In the three weeks since that happened, muni bond mutual funds that report their flows weekly have seen investors pull out $4.4 billion, according to Lipper FMI, The Wall Street Journal reports.

In that same period, corporate investment-grade bond funds saw an inflow of $3.3 billion.

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Inside the muni market, higher-rated debt is outperforming lower-rated issues. While junk-rate munis posted a negative return of 1.88 percent since Detroit's move, investment-grade munis are down a much smaller 0.847 percent, according to Barclays, The Journal notes.

And investment-grade corporate bonds have slipped still less — 0.143 percent.

Munis already had suffered during the bond market's May-June rout. Detroit's bankruptcy filing "put a further scare into the marketplace," Lyle Fitterer, managing director at Wells Capital Management, tells The Journal.

"Why take the risk when you can get the yield in a higher-quality instrument?" he said. "There's definitely some of that going on."

"There has been a flight to quality in the muni market," Burton Mulford, portfolio manager at Eagle Asset Management, tells The Journal.

J.R. Rieger, vice president of fixed-income indexes at S&P Dow Jones, calculates that the muni bond drop since Detroit's filing has lopped $13.8 billion off the $1.4 trillion par value of the S&P Municipal Bond Index, according to MarketWatch.

To be sure, not everyone sees Detroit's bankruptcy move as a death knell for the muni market.

John Dillon, chief muni bond strategist for Morgan Stanley Wealth Management, sees attractive opportunities among munis with five- to 11-year maturities.

"While certainly Detroit is the 800-pound gorilla in the room, the state of municipal credit has actually been improving," he tells Reuters.

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