NEW YORK ( TheStreet ) -- Most bonds have declined lately, but the damage has been particularly severe for municipal bonds and the mutual funds that invest in them. This year mutual funds that invest in intermediate-term municipal bonds across the nation lost 3.5%, while funds that invest in high-yield municipal funds declined 7.4%, according to Morningstar. At the same time, the Barclays Capital U.S. Aggregate Bond index dropped 2.3%. Now, however, some portfolio managers argue that municipals have reached attractive levels. UMUHX). Walls says that municipals were not cheap at the beginning of the year. Then in the spring, prices collapsed and yields rose. Yields on triple-A-rated 30-year bonds have risen from around 3% early in the year to 4.6% now. The current tax-free yield is the equivalent of a taxable bond that yields 7% for high-income investors. Some bonds rated triple-B-minus, the lowest investment-grade rating, now yield 6.5%, up from 4.5% early in the year. The big downturn began in May and June. After Federal Reserve Chairman Ben Bernanke talked about tapering his bond-buying program, investors started dumping bonds of all kinds. As prices fell, yields rose. The rout in municipals became exacerbated by media reports that holders of Detroit bonds could face losses in bankruptcy proceedings. Panicked shareholders withdrew $31 billion from municipal mutual funds, a big sum for a fund category that has a total of $518 billion in assets. "Retail investors looked at their monthly statements, and they started selling," says Walls of Waddell & Reed. To capture attractive yields, consider mutual funds that fared relatively well during the downturn. Successful funds include Baird Intermediate Municipal Bond ( BMBSX), Thornburg Intermediate Municipal ( THIMX) and Waddell & Reed Municipal High Income. The winning managers emphasized short-term bonds or used other techniques to limit losses. Those approaches could protect shareholders in future downturns.
Top-rated bonds were relatively resilient in recent months as nervous investors steered away from shaky issues. Although the average intermediate municipal portfolio has 15% of its assets in triple-A-rated securities, Baird has 68% of assets in the top-rated category. The approach is designed for conservative investors. "Many municipal investors have made a lot of money, and they are focused on preserving wealth," says Baird portfolio manager Warren Pierson. The cautious approach worked especially well in the turmoil of 2008. For the year, Baird returned 6.0% and outdid 99% of peers. The conservative stance does not win every year. In 2012, investors gained confidence and sought to obtain higher yields from low-quality bonds. For the year Baird lagged most peers. Follow @StanLuxenberg This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.