Top-rated municipal bonds now yield from 2 percent (for five-year bonds) to 4 percent (15-year bonds). Those are tax-exempt yields so you’d net more than you’d get from taxable bank accounts or Treasuries, after-tax. Moreover, the outlook for investing is favorable:
More demand. With federal income taxes likely to head higher in the next few years, high-bracket investors increasingly will favor tax-free income from munis.
Lower supply. As much as 25 percent of new debt issued by state and local governments is expected to be in the form of taxable "Build America Bonds," through 2010. Issuers of these bonds get a subsidy from the federal government so they will offer more taxable bonds and fewer tax-exempts.
With demand up and supply down, today’s municipal bond investors are likely to see prices hold steady or even appreciate. One strategy is to build a ladder by holding municipal bonds maturing in 2010, 2011, 2012, etc. Another approach is to invest through mutual funds, where yields currently average 3.8 percent, according to Morningstar.
