Catching the Wave of Municipal Bonds

It's been a puzzling summer for bond fund investors. The widely anticipated selloff in bonds somehow morphed into a rally, despite spiraling oil prices and a Fed chairman unwilling to see mixed economic data as anything more than a "soft patch" in the economy. Historically, under these conditions, rates should have spent the past three months rising, not falling.

The benchmark 10-year Treasury has traded around 4.25%, down from a June high of 4.88% and right back to where it was in April. But many strategists do not expect this low-rate reprieve to last and are steering clients out of Treasuries into tax-free municipal bonds before oil prices drop and the Fed hikes rates in September.

A municipal, or muni, bond is a debt security issued by a state, municipality or county in order to finance capital expenditures, such as bridges or sports stadiums. Municipals, as opposed to taxable bonds like Treasuries and corporates, are exempt from federal taxes and from most state and local taxes, especially if you live in the state the bond is issued, which is the essence of their attraction. ...