"Between early November and mid-January, the normally staid municipal bond market plunged; and despite recovering off the lows, federally tax-exempt muni funds with an average credit quality of AA+ still carry yields of better than 6%," notes income expert Carla Pasternak.

The editor of High Yield Investing explains, "Launched in 1991, Nuveen Premier Insured Municipal Bond (NIF) is one of the longest-standing muni funds. It's managed by Nuveen, specialists in the muni area.

"We've all read stories about the states' budget woes. In the wake of falling tax revenues, brought on by the decline in the housing market and the recession, U.S. states are tightening their belts; so why would I invest in state municipal bonds?" asks income specialist Amy Calistri.

The editor of The Daily Paycheck explains, "Here's the reasoning behind our recommendation for PIMCO Municipal Income (PMF).

"In the wake of falling tax revenues, brought on by the decline in the housing market and the recession, U.S. states are tightening their belts. Some states, such as California, are facing sizable budget challenges.

"Interest rates on money markets, conventional bonds and bank CDs are extremely low by historical standards, especially given that the economy faces above average inflation risks in the years ahead," notes Dr. Marvin Appel.

The editor of Systems & Forecasts explains, "As a result, we are finding that there is a lot of demand among investors for an investment program that can produce attractive levels of income without being too risky; as such, we are introducing a high income portfolio.

"Think munis are a risky deal?" asks income expert Neil George. In his Stocks that Pay You, he states, "Don't. Instead, buy them now."

However, rather than buying individual bonds, the advisor suggests that investors focus on buying closed-end muni bond funds. Here, he looks at a trio of favorites.

"The muni market isn't for the uninformed or the novice. Unlike the treasury market and much of the corporate market - when it comes to munis - you have to know each bond inside and out before you buy, and keep tabs on it after you buy.

This post is part of a 12-article feature that can be read here: Today's best income ideas.

"The markets are littered with compelling buying opportunities that may be the best we see in a generation," says Keith Fitz-Gerald.

In The Money Map Report, he looks at a trio of income ETFs -- one focused on Treasury inflation protected securities, one invested in muni bonds, and one that buys high yield corporates.

"We are holding three positions in our portfolio which we believe can be bought with new money. First, we suggest iShares Lehman TIPS Bond ETF (NYSE: TIP). The 10 year TIPS' yield is 2.23% versus 2.40% for 10 year Treasuries.

This post is part of a 12-article feature that can be read here: Today's best income ideas.

"Though all the king's horses and all the king's men attempted to piece together some confidence in the market indexes, it hasn't been enough," says Brandon Clay.

In his Invest with an Edge, he suggests, "Investors should consider safe alternatives for this risky environment. One such ideas is a unique muni bond ETF -- Market Vectors Pre-Refunded Municipal Index Fund (NYSE: PRB)."

"Although equities tend to have attractive multi-year growth rates, there is always risk," caution Ron Rowland and Brandon Clay.

In their Invest with an Edge, they explain, "That's why investors have been taking a second look at bonds, specifically municipal bonds." Here's an ETF offering exposure to the muni bond sector.

"Affectionately called 'munis', municipal bonds have enjoyed a resurgence among retail investors, who are buying munis for three reasons:

1) Munis Have High Yield & No Taxes in Difficult Markets

"Municipal bonds are unique investment vehicles. They offer yields, but the interest is not taxed by the IRS. That way, the 'effective' yield for the muni is often higher than on taxable bonds. Moreover, as prices for munis have been falling, yields have been rising.

2) Munis Are Relatively Safe Investments

"When you're buying a muni bond, you're actually loaning to a state/local government or their agencies. Although cities can go bankrupt – thus preventing you from receiving back your initial investment – at least we can vote on governors and mayors.

"As a result, munis are a safer investment than many corporate bonds. Munis are one way for investors to find safety in this market.

"We're taking a hard look at municipal bonds," says Keith Fitz-Gerald. In The Money Map Report, he adds, "Our favorite play is Nuveen Quality Income Municipal Fund (NYSE: NQU).

"If you have been thinking about putting some new cash to work, now's a great time to do so. In general, municipal bonds are about as cheap as they've been in decades.

"Munis are really very simple instruments. When most states, cities or even counties engage in large-scale construction projects, they typically issue debt in exchange for the money they need in the form of a municipal bond.

"Because the Fed considers them tax-free instruments, munis with lower rates can actually equal far higher taxable yields. For instance, a 3%-to-5% tax-free note can be equal to a taxable one of 5% to 7% under normal circumstances, particularly for investors in higher tax brackets.

"But these are hardly 'normal' times. Especially when you consider that many munis are actually paying more than taxable treasuries at the moment.

"Our favorite play is the Nuveen Quality Income Municipal Fund, which is paying a juicy 5.60% tax free at a time when 10-year treasuries are offer a taxable 4.10%. Put another way, in order to equalize the two, we'd have to find a taxable yield of 7.82%.

"Give muni bonds a good look." says Richard Moroney in Dow Theory Forecast, a leading "blue chip" newsletter that has been publishing for over five decades, who offers a trio of Vanguard funds for investors seeking safety and income.

The advisor explains, "Municipal bonds are showing signs of life, presenting investors with an intriguing opportunity." Here, he review the situation and offers some favorite investment vehicles.

"Muni bonds usually yield less than Treasurys because interest payments from municipals are exempt from federal income taxes.

"But in today's topsy turvy market, intermediate-term municipal bonds now yield around 3.7%, versus 3.6% for 10-year Treasurys. A tax-free yield of 3.7% is the equivalent of a taxable yield of 5.5%, assuming a 33% federal tax bracket.

"Uncertainties about the economy and credit concerns have weighed on bonds, lowering prices and raising yields. Hedge funds have also dumped muni bonds in an attempt to cover trading strategies gone sour.

The good news is that MBIA (NYSE: MBI) saved its S&P "AAA" rating, meaning bonds it insures will not lose their value. A drop in the rating could have caused write-offs at banks that own paper covered by the bond insurer.

MBIA also announced yesterday that it will, sometime in the next five years, break its muni-bond insurance business from its structured finance operations, forming two companies. Structured finance bonds have lost much of their value because they include CDOs and mortgage securities.

The move may have helped save the company, but it comes with a huge cost. MBIA is eliminating its dividend to save $174 million a year. For investors taking advantage of the company's 10% yield, the news could hardly be worse.

MBIA may have bought itself some time, but it put the wood to shareholders to stay afloat.

Douglas A. McIntyre is an editor at 247wallst.com.

It seems as though every week, the public is forced to learn another one of Wall Street's strange names for a surefire deal that couldn't miss. But the reason we're learning about those strange names is because -- contrary to promises -- the can't miss deals are shutting down -- taking Wall Street's credibility down along with them.

The latest of these is auction rate securities (ARSs) -- a $330 billion market for long-term bonds that are supposed to pay lower rates because their interest rates are set through auctions. The New York Times reports that municipalities who issued ARSs are suffering because 1,000 of these auctions failed and instead of paying 3% interest rates, they have to pay 20%. And if that wasn't bad enough, the investment banks that oversee these auctions are refusing to let investors withdraw their money.

Which investment banks are imposing this pain? Goldman Sachs Group (NYSE: GS), Merrill Lynch (NYSE: MER), and Lehman Brothers Holdings (NYSE: LEH) and the problem with ARSs is not limited to municipalities entities such as the Port Authority of New York and New Jersey. Closed-end mutual funds, student loan companies and corporations also issue them.

MBIA Corp. (NYSE: MBI) remains confident that it can keep its AAA ratings and brushed aside suggestions by hedge fund investor William Ackman that it's on shaky financial ground.

"Our anticipation in response to the turn in the market has been singular among the monoline insurers, putting us in the best position to maintain our AAA ratings among the large public companies," The Wall Street Journal quotes CEO Gary Dutton as saying.

Those bullish comments were enough to give a lift to MBIA's shares, which are down almost 80% over the past year, along with rival Ambac Financial Corp. (NYSE: ABK), down almost 87% for the year. For now, the market ignored the $2.3 billion fourth quarter loss which included a whopping $3.5 billion in write down in its credit derivatives portfolio.

Ackman, who is pledging his short-selling profits to charity, argues that the Armonk, NY-based company faces losses of $11.63 billion from asset-based securities nearly equal to the $11.61 billion losses looming at Ambac. MBIA , which says it's on track to raise $2 billion, scoffs any suggestions that it may be insolvent. CFO Chuck Chaplin told the paper that it has enough capital for the next six years.

Is this a sucker's rally or the real deal?

The New York Times fingers hedge fund manager William Ackman for yesterday's down market. That's because Ackman has been a vocal pioneer of the idea that bond insurers lack the capital to back their bets on the solvency of the bonds they insure and they might lose $24 billion as a result. And the holders of those bonds are banks and insurance companies which will be forced to write-down the value of those bonds -- to the tune of $70 billion more -- if the bond insurers lose their AAA ratings.

I wrote about Ackman's bet against bond insurance last May. If you had followed my suggestion to follow Ackman's short sales of MBIA (NYSE: MBI) and Ambac Financial Group (NYSE: ABK) you would have profited from the respective 81% and 89% declines in these stocks since then. And as a protege of Harvard Business School Professor Michael E. Porter -- with whom I worked -- I admire Ackman's analytical skills and his willingness to put money into his bets. Moreover, Ackman pledged to give the profits from his bond insurance short sales to charity.

But Ackman's estimate of the losses from downgraded bond insurers is big and scary. His report yesterday predicted that MBIA and Ambac might lose $24 billion on the CDOs they guaranteed. That $24 billion is a significant percentage of the $1 trillion in municipal, corporate and mortgage debt that they insure with their AAA ratings. Unfortunately, ratings agencies like S.& P. and Moody's Investors Service may downgrade them due to a lack of capital relative to their potential losses.

New York State Insurance Superintendent Eric Dinallo has been twisting the arms of major banks to get them to put up $15 billion or so to bail out Ambac Financial Group (NYSE: ABK) and MBIA Inc. (NYSE: MBIA). If the muni bond insurers cannot maintain their high ratings with agencies like S&P, the value of the bonds that they insure could drop sharply, leading to more write-offs at Wall Street firms.

S&P has now said that the $15 billion may be just fine. "The dollars we understand that he's talking about -- $5 billion immediately and $15 billion ultimately -- those are substantial numbers and I think could give us a fair degree of comfort relative to resolving any issues about capital adequacy," S&P analyst Dick Smith said in an interview with Reuters.

The fact of the matter is that no one knows how much money will be needed because no one is certain how much worse the credit crisis and mortgage debacles may get. That, in turn, is likely to make big banks gun-shy about writing checks for money that they may not have themselves. Most are in the market raising funds to save themselves.

The value of the two big muni bond insurers could still go to zero and the big banks my not want to see all of that capital disappear.

If New York State wants to act, it should bring capital of its own to the table and not ask the banks to carry the whole load.

Douglas A. McIntyre is an editor at 247wallst.com.