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
Alarmist predictions called for many major municipal defaults this year, but the opposite is true. In fact, the latest news from Harrisburg, PA, only underscores how rare they are.
By Cyrus Sanati, contributor
FORTUNE -- Harrisburg, Pennsylvania's current muni mess shouldn't be viewed as a harbinger for an imminent meltdown in the $2.9 trillion municipal bond market. The tiny city probably would have found itself in the same situation even if the general MOREOct 20, 2011 8:51 AM ET
S&P slashed ratings on thousands of municipal bonds this week in a largely symbolic move. No major state and local governments were included, but that doesn't mean they're all in the clear.
By Cyrus Sanati, contributor
FORTUNE -- The S&P downgrade machine cut through the U.S. municipal bond market earlier this week, stripping thousands of securities of their coveted triple-A credit rating. While on the surface the pruning of the muni space MOREAug 11, 2011 10:30 AM ET
The outspoken municipal bond bear follows up with more evidence that the fiscal troubles in many states are far greater than we've been told.
FORTUNE -- Meredith Whitney is issuing a fresh warning to mutual funds, banks, and politicians: The state of state finances is far worse than what you think, or at least than what you've been willing to tell the investors and taxpayers who will eventually carry the burden. MOREShawn Tully, senior editor-at-large - Jun 6, 2011 1:44 PM ET
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