AUTHORS: The municipal bond research team at DWS Investments.

METHODOLOGY:Analysts examine major muni bond market events and implications for individual investors.

MAJOR FINDINGS:Muni bond insurers' difficulties removed an important layer of safety for investors and suppressed prices for top-rated bonds issued in 2008. Investors who hold triple-A-rated bonds must sell at a loss or hope they can recover their principal when the bonds mature.

Nevertheless, tax issues helped boost demand among retail investors. In 2009, investors concerned about possible increases in federal and state taxes bought muni bonds to secure tax-free income. Net inflows into muni bond mutual funds reached $62 billion in the first 11 months of 2009, eclipsing the previous record of $44 billion set in 1993, DWS says, citing Lipper data.

Federally subsidized Build America Bonds (BABs), which pay higher yields, also helped mitigate falling muni prices by attracting tax-exempt institutional investors. Municipalities began issuing BABs instead of traditional munis in 2009, reducing the supply of new tax-exempt debt. With fewer such bonds, those prices are rebounding.

HIGHLIGHTS: Despite recent price jumps, munis were within historic ranges at press time, relative to U.S. Treasuries. Normally, triple-A munis yield 80% to 90% of a Treasury with the same maturity. As trading ended Jan. 12, 10-year, triple-A munis yielded 81.9% of 10-year Treasuries, and 30-year bonds yielded 89.4%. Yet the struggles of monoline insurers haven't prevented fiscally strong states like Maryland and North Carolina from issuing triple-A-rated bonds, so investors still have access to munis with strong underlying credit.

THE AUTHORS SAY: "The credit environment is weaker, but not all munis are the same," says Ashton Goodfield, head of muni bond trading at DWS. "Tax rates are likely to go up at the end of this year, and an aging population will need more tax-exempt income." -Donna Mitchell

CORRECTIONS

"NY Life Woos RIAs" (Dec. 2009, p. 39) stated that Morningstar selects the investments for the New York Life platform. In fact, Morningstar Investment Services, a subsidiary, chooses the investments. Also, Bill Harding is director of research for Morningstar Investment Services, not an analyst. In the January CE Quiz (p. 72) question No. 3 said gold prices plunged from over $850 an ounce in mid-September of 2009 to barely more than ___ by late October. It should read: During 2008, gold prices plunged from over $850 an ounce in mid-September to barely more than ___ by late October.