In the year since the credit crisis took hold, municipal bonds have been yielding more than Treasurys — and they're free from federal...

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In the year since the credit crisis took hold, municipal bonds have been yielding more than Treasurys — and they’re free from federal income tax. While the higher yield is due, in part, to the credit crunch and slow economy, many experts view munis as a smart bet.

Traditionally, people in high tax brackets bought munis, because though the bonds’ yields were lower than those of Treasurys, they were tax-free.

Lately, with yields well above Treasurys, munis aren’t just tax havens. Robert J. Froehlich, investment strategist at Deutsche Asset Management, says munis are the only bonds he recommends now.

Still, Jim Lynch at Lynch Municipal Bond Advisory says the higher yields reflect credit worries: “People are afraid of what’s under the tent.”

He says, “We’re going to be in for a major recession that is already impacting tax revenues.” What’s more, enormous infrastructure needs will prompt states and cities to issue more bonds, “which will make yields even higher,” he says.

Jefferson County, Ala., is teetering on the edge of bankruptcy after it missed an interest payment.

Friday, California Gov. Arnold Schwarzenegger asked the federal government to protect his state if it is unable to borrow to fund routine operating expenses.

Jay Mueller, economist at Strong Capital Management, says that while some issuers may face shortfalls, rising yields have less to do with perceived muni risk than with troubles in the market for auction-rate securities earlier this year.

“Generally speaking, munis are a good place to hide,” he says.

Morningstar says the average muni-national fund has lost nearly 5 percent this year. That’s far less than the stock market, but a decline nevertheless.

“Those who invest in these funds should make sure they have a long enough time horizon to withstand a few bumps in coming months,” writes Morningstar analyst Karin Anderson.