Catching the Wave of Municipal Bonds

"While credits as a whole are better than they were a couple of years ago, there are still some spots that need improving," says Smith Barney's Fare. "We are hoping states put their fiscal houses in order during the downturn, but that's on a state-by-state basis."

Although Wall Street traditionally veers toward the right on financial issues, a final risk for the muni market may be a Republican victory in November. That's right. The supply and demand of munis is very much dependent on changes in the tax code, so most analysts say a Kerry victory -- and the higher taxes that would likely follow it -- would stir wealthy Americans to snap up muni supply, thus boosting prices.

"Kerry would be better for the muni market because he wants to raise the taxes of wealthier Americans. That would make munis more valuable as demand will increase," says Nuveen's Fitzgerald. "A Bush victory would hurt muni prices because it involves a flatter tax code and lower taxes."

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