Investors Piling Into Municipal Bonds

Recent data shows that investors are piling into the tax-free yields and relative safety of municipal bonds.

According to a Reuters article:

"Demand was evident in the first-quarter's big finish, with the issuance of about $12 billion (8 billion pounds) in debt, including a massive California deal, in the final week. That was the strongest weekly issuance total since December 2006, according to a Savader Asset Advisors report.

After the market's "deep freeze" late last year, "municipal volume expanded during the quarter, indicating a growing acceptance among investors for municipal debt," said the report, released on Monday."

Last quarter also showed the largest net month-over-month increase in flows into muni bond funds in history.

Investors are attracted to relatively high yields versus Treasuries, the safety of municipal bonds, and their tax free advantages. If taxes go up, as many predict they eventually will, ,municipal bonds wil beocme even more attractive.

The potential downside of investing in municipal bonds is if inflation and interest rates spike up. If rates go to up and you can get a muni that pays 7-8% in one year, then locking into one that pays 5% today isn't that attractive. But despite fears of inflation, many believe that deflation is actually the bigger threat, a la Japan in the 1990s. In that case, a 5-6% tax-free municipal bond would look really attractive.

• Learn more about municipal bonds.