A Sweet Spot for Munis

Investors seeking shelter from the credit crunch have flocked to treasuries and snubbed other categories of fixed income—even traditionally safe municipal bonds. The sell-off has boosted muni yields to unusual heights relative to long-term treasuries. Issued by cities, counties, states, and assorted agencies, munis have long been popular with high-income investors because their interest payments are free of federal taxes. Today, munis offer tax-equivalent yields that trump long-term treasuries', making them good bets for all investors. "We're in an unusual period where the rush to quality caused yields on treasuries to plummet, but yields on munis didn't follow," says Josh Gonze, co-portfolio manager at Thornburg Investment Management.

Munis usually yield less than ultrasafe, long-term T-notes. You can now buy top-quality, 10-year munis yielding around 3.6 percent, slightly below the 3.9 percent yield on conventional 10-year treasuries. But the muni offers the equivalent of a taxable 4.8 percent yield for an investor in the 25 percent federal tax bracket. The same idea applies to municipal bond funds. Such a deal.