Municipal Bond Funds Fare Well in May

In normal times, the generally muted returns of municipal bond funds wouldn't be expected to place any number of such offerings on a top-10 performance list.

Well, these are anything but normal times, a fact underscored by the dominance of tax-exempt funds on the accompanying table of top open-end bond funds for May.

Muni bond funds enjoyed a bounce in May after being pressured for months by a variety of forces. Threats to their exemption to state income taxes have been disrupting the muni market for months, with the issued finally resolved in favor of the tax-exempt vehicles. If that weren't enough, the triple-A credit ratings of insurers of muni bonds have been in doubt as a result of the credit crunch.

Major insurers of muni bonds include: Ambac Financial Group(ABK Quote - Cramer on ABK - Stock Picks), MBIA(MBI Quote - Cramer on MBI - Stock Picks) and Financial Guaranty Insurance, whose largest holder is PMI Group(PMI Quote - Cramer on PMI - Stock Picks). Bond insurers guarantee roughly $2.4 trillion in debt.

Losses during the credit crunch, especially on collateralized-debt obligations secured by subprime mortgage-backed securities, resulted in threats to the credit ratings of the bond insurers. If their ratings were to be lowered, the bonds they insure would no longer share the high ratings of the insurers.

In addition to all that, many tax-exempt bond funds are leveraged, and turbulence in the auction-rate securities market earlier this year reflected negatively on their returns.

Of the seven muni members on the top-10-bond-fund list, six are managed by Eaton Vance Corp.(EV Quote - Cramer on EV - Stock Picks).

The tax-exempt funds dominating the winners list are joined by two high-yield corporate bond funds, the Highland High Income Fund(HHIAX Quote - Cramer on HHIAX - Stock Picks) and the Oppenheimer Champion Income Fund(OPCHX Quote - Cramer on OPCHX - Stock Picks).

The top performing bond fund for May, the Rydex Series Inverse Governmanet Long Bond Strategy Fund(RYAQX Quote - Cramer on RYAQX - Stock Picks), jumped 3.40% in May, but has surrendered 7.74% over the past 12 months.

BEST PERFORMING BOND FUNDS FOR MAY
NAME, TICKER & TheStreet.com RATINGS GRADE	INVESTMENT OBJECTIVE	MAY '08 RET'N (%)	YR-TO-DATE TOTAL RET'N (%)	12-MO. TOTAL RET'N (%)	TOTAL NET ASSETS ($MIL)
Rydex Ser-Inv Govt Lg Bd Stgy A (RYAQX) E-	US Treasury (Inverse)	3.40	1.32	-7.74	61.3
Highland High Income Fund A (HHIAX) U	Corporate - High Yield	2.53	-2.91	-10.18	0.1
Eaton Vance SC Muni A (EASCX) E-	Municipal - Single State	2.33	0.04	-1.66	109.9
Oppenheimer Roch VA Muni Fund A (ORVAX) U	Municipal - Single State	2.20	-6.21	-16.24	22.5
Eaton Vance MA Muni A (ETMAX) E-	Municipal - Single State	2.06	0.49	-2.31	233.8
Eaton Vance National Muni A (EANAX) E-	Municipal - National	2.03	-0.82	-4.33	4,637.8
Oppenheimer Champion Income A (OPCHX) E-	Corporate - High Yield	2.02	0.32	-4.51	1,511.6
Eaton Vance NY Muni A (ETNYX) E-	Municipal - Single State	2.00	0.84	-0.61	371.1
Eaton Vance PA Muni A (ETPAX) E	Municipal - Single State	1.99	0.40	-0.45	235.5
Eaton Vance VA Muni A (ETVAX) E-	Municipal - Single State	1.95	0.49	-2.45	110.3
Source: TheStreet.com Ratings - Data as of 5/31/2008. For an explanation of our ratings, click here.