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Municipals, an Alternative to Treasuries

If you're fearful of an all-out collapse of the global financial system in the next few months, you're not alone.

Take a look at the 0% yields on some short-term Treasuries and the high prices being paid for U.S. government debt by American and -- more importantly -- foreign investors. This is a clear flight to safety despite the government's enormous bailout programs. Some place the current bailout total at $7.5 trillion if all funds that have been promised are used.

This is a global crisis and, luckily for the U.S., the country is still seen as a safe haven relative to other world economies, including the eurozone and England. That's why Treasury prices have continued to rise. But if you want to buy safety a little cheaper, you may consider municipals.

These securities contain risk. After all, the risk for Treasuries is that prices are too high and, thus, getting in at these levels and not getting out at the appropriate time may expose you to losses. With a 0% yield, you certainly aren't being compensated enough for that and other potential risks, such as inflation down the road.

Let's face it: The whole game in the bond market right now is whether a particular issue is being backed by the U.S. government -- you know, the taxpayer. So if you're going to play the "government-backed angle" for bond investments, why not go for cheaper municipals? They, too, are government-backed. I know that states can't print money like the federal government can, but, still, they are part of the government, and it's hard to imagine the feds would bail out Wall Street and corporate America but not the states.

Further consider that foreign investors may also be interested in U.S. municipals if they balk at the high prices of Treasuries but still want to invest in safety in the U.S.

Below is a list of some of the best-performing closed-end funds for November, all of which are invested in municipals.

November's Best-Performing Closed-End Funds
One-Month Return
Western Asset Managed Municipals Fund Inc
BlackRock MuniEnhanced Fund Inc
Nuveen Arizona Dividend Advantage Municipal Fund
Nuveen Ohio Quality Income Municipal Fund
Van Kampen Massachusetts Value Municipal Income Trust
Nuveen Ohio Dividend Advantage Municipal Fund 2
Eaton Vance Insured New Jersey Municipal Bond Fund
Muni-New Jersey
BlackRock MuniYield Fund Inc
Nuveen North Carolina Dividend Advantage Municipal Fund 2
Muni-North Carolina
Eaton Vance Insured Pennsylvania Municipal Bond Fund
Source: Ratings
Sam Patel, CFA, is the manager of mutual fund research for the Ratings.

In keeping with TSC's Investment Policy, employees of Ratings with access to pre-publication ratings data must pre-clear any potential trade through the legal department, and are prohibited from trading any security that is the subject of an unpublished rating revision until the second business day after the rating is published.

While Patel cannot provide investment advice or recommendations, he appreciates your feedback; click here to send him an email.

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