Municipal bonds are a great deal, if they don't default

— -- Q: Seems like municipal bonds are a good deal for investors. Is there a way to research these securities and pick some that look attractive?

A: History is being rewritten when it comes to municipal bonds.

Because many municipal bonds are exempt from federal and state tax, if certain requirements are met, they can offer some attractive yields compared with other, taxable investments. For that reason, municipal bonds usually have lower published yields than Treasuries — because the tax savings makes up more than the difference.

But now, with investors so nervous about the economy, muni bonds are yielding more than Treasuries in some cases, even without factoring in the tax savings. Many bond traders say this presents a once-in-a-lifetime opportunity for investors willing to buy and hold muni bonds to maturity.

Here's the downside: While municipal bonds have been safe and predictable over the years, you are exposed to the risk that the issuer could default, expecially in tough economic times. To know what kind of risk a specific bond carries, you need to research the city, state or other local government you're lending to, understand the tax base, demographic trends and local economy. You also need to understand the way the deal is structured and what kinds of safeguards you have.

This kind of analysis wasn't as important when most municipal bonds were backed by insurance. You could buy a muni bond and feel secure, since the insurer would pay you if the city couldn't. But now the insurers are strained financially, and there's not a great deal of faith in their ability to pay.

If you're interested in researching individual muni bonds, the Municipal Securities Rulemaking Board provides a free online system, called Electronic Municipal Market Access, or EMMA, to help you. You can look up particular securities or issuers and learn more about them. The site is free and available here.

If you're not comfortable with your ability to analyze individual muni bonds, that doesn't mean you're left out. There are many mutual funds that either pick individual muni bonds from issuers in particular states or that assemble indexes of them. Owning more than one bond spreads the default risk. And if you already have a brokerage account, you can buy exchange-traded funds (ETFs) that own muni bonds.