FORTUNE -- There are legitimate reasons to fear a municipal bond bubble, as my colleague Allan Sloan warns in his column. A torrent of money is pouring into the sector, hiking up prices and lowering yields. But if you're smart about your strategy, investing in the $3.7 trillion market for tax-exempt bonds can still provide strong and safe after-tax returns.
Here are two mutual funds that offer good yields yet guard against the principal danger in munis -- a sharp rise in interest rates. Fidelity Intermediate Municipal Income (FLTMX) offers a yield of 2.9% and low fees. T. Rowe Price Tax-Free Income (PRTAX) provides a somewhat higher yield of 3.86%, in part because manager Konstantine Mallas is skilled at buying bonds that can be "called," or paid off early by the issuers. Because of the uncertainty, they usually offer higher yields.
If you live in a high-tax state such as New York or California, you'll have to pay state and local levies on out-of-state bonds, so you may want to concentrate on local issues. In New York, Lebenthal muni expert Greg Serbe recommends New York State Dormitory Authority bonds, backed by Columbia University, maturing in 2021 with a yield of 3.1%. In the Golden State, he likes Sacramento County Airport System, at 3.0%.
This story is from the December 24, 2012 issue of Fortune.
BACK TO: The new queen of Wall Street
A flood of money into fixed income drove once-stable bonds into bubble territory before starting to retreat this month. Here's how to adjust your strategy and protect your portfolio.
For generations, bonds have offered investors a safe haven that provides both steady income and far more stable prices than mercurial, zigzagging stocks. But lately, bonds have been doing the zigzagging, threatening the very qualities that make fixed income so attractive.
The financial MOREShawn Tully, senior editor-at-large - Dec 16, 2010 5:00 AM ET
The battle between bond manager Jeffrey Gundlach and his former firm, TCW, is getting even more muddled after revelations of a government inquiry.
By Mina Kimes, writer
More than a year has passed since L.A. money management firm TCW fired its star investor, Jeffrey Gundlach, but their bitter feud, chronicled in Fortune earlier this year, shows no signs of cooling off. Both sides, who are still mired in a legal battle, MOREDec 15, 2010 11:37 AM ET
Intel's (INTC) lessons for Apple (AAPL).
Bond funds cost too damn much.
Dallas Fed researchers deem a double dip unlikely.
Buybacks don't work, for crying out loud.
In for a Penny, in for a pound.Colin Barr - Jul 16, 2010 4:25 PM ET
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