* Asset shrinkage supports view of risk appetite
* Two-week asset fall biggest in nearly 10 months
* Federal budget fight seen curbing fund outflows
NEW YORK, Jan 23 (Reuters) - U.S. money market fund assets fell for a second week in a row, supporting the view that investors are reducing their cash holdings and buying stocks, corporate bonds and higher-yielding investments in early 2013, according to a private report released on Wednesday.
Investors withdrew $15.29 billion from money market funds in the week ended Jan. 22, bringing their total assets to $2.670 trillion, the Money Fund Report said.
Money fund assets declined by $31.45 billion in two weeks, which was the biggest fall in a two-week period since March 2012, when they fell $37.65 billion.
At the same time, Wall Street stocks reached five-year highs as data fueled appetite for corporate and emerging market debt.
Investors typically reinvest the cash they accumulate at year-end when the new year begins. This move into riskier assets has been intensified by Washington reaching a deal in early January to avert the "fiscal cliff" -- a series of automatic federal tax hikes and spending cuts that was set to begin in early January, which some feared would cause a U.S. recession.
"We have seen a reallocation into risky assets after the 'fiscal cliff' discussion," said Sean Simko, head of fixed-income management at SEI Investments in Oaks, Pennsylvania.
However, Simko and other analysts cautioned that possible contentious budget negotiations between President Barack Obama and Republican lawmakers remain key worries for investors.
On Wednesday, the House of Representatives voted to raise the federal debt limit, currently at $16.4 trillion, into May. The Republican-backed plan was expected to pass the Senate and President Barack Obama signaled he will sign the bill.
The bill, when enacted, would stave off an imminent government default. But it did not soothe worries about a political fight over possible deep spending cuts and their impact on the economy.
Signs of another stand-off, together with any sign of the U.S. recovery weakening, might snuff out the revival in the stock market and appetite for riskier bonds, analysts said.
But for now, they anticipate further drawn down in cash for the purchases of stocks and other higher-yielding investments.
In the latest week, taxable money market fund assets decreased $12.85 billion to $2.384 trillion, while tax-free assets were down by $2.44 billion at $286.11 billion, according to the report, published by iMoneyNet.
Yields on taxable money market funds were unchanged from the previous week at 0.02 percent, according to the report.
The yield on tax-free funds was unchanged at 0.01 percent.