The Muni-Bond Technical Tango

Municipal bankruptcies are hitting the headlines again, and much of the recent action is coming out of the Golden State. Stockton, Calif., filed for Chapter 9 bankruptcy protection on June 29, becoming the largest city and third largest municipality to declare bankruptcy. Small ski town Mammoth Lakes followed a week later, and the city of San Bernardino voted to file shortly after that.

A muni-market bankruptcy trifecta is a rare thing, and this news would have caused plenty of hand-wringing in late 2010, when bonds were selling off and default paranoia reached a fever pitch. But muni investors are shrugging it off this time around. In fact, they've gotten more comfortable with risk as the year has progressed, even as muni-bond yields have continued to grind lower. High-yield muni funds in particular have been in vogue lately, taking in nearly $4 billion during the past three months alone.