Many closed-end muni funds are leveraged, borrowing at low short-term interest rates and investing the proceeds in higher-yielding long-term bonds.

Market participants said the sharp rise in stock prices helped to accelerate the move into higher-yielding bonds and notes.

"The yields have dropped so low that people are once again switching out of funds into higher-yielding long- term tax-exempt bonds."

So holders may want to trade those bonds for higher-yielding regular bonds, Ms. Keating said.

But during the first half of this year, foreigners put $270.5 billion in Treasuries, twice what they put in higher-yielding but riskier corporate bonds.

The Dow Jones industrial average fell 36.89 points, to 3,624.98, as anticipation rose that money would flee the stock market for higher-yielding bonds.

The preferred pays interest at low, short-term interest rates but the money from their sale is invested in higher-yielding long-term bonds.

He said that the higher rates should push up investment income as insurance companies buy new, higher-yielding bonds.

She suggested moving money from stocks to higher-yielding corporate bonds, whose allocation she raised to 12 percent from 10 percent.

These investors are now gradually moving some assets into the higher-yielding bonds of such countries as New Zealand and Australia, Mr. Dirnberger said.