Municipal Funds Veer From Safety to Danger

The credit crisis has clobbered most bonds. But the damage is especially notable in municipal markets. During the 12 months ending in November, municipal long-term funds lost 9.1% of their value, according to Morningstar. High-yield municipal funds dropped 20.4%.

What makes the losses so unsettling is that tax-free bonds normally seem stodgy. Because many of them are backed by tax revenues, municipals rank as the second-safest category behind Treasuries.

Most often, municipal funds grind out single-digit returns. Only a percentage point or so often separates the top performers in the category from also-rans. This year, returns were all over the map, ranging from single-digit gains to losses of more than 30%. ...