As individual investors see the value of their muni mutual funds decline, they sell to avoid deeper losses, said Ed Reinoso, chief executive officer of New York-based Castleton Partners LLC, which manages $250 million of fixed-income securities for people with a minimum of $2 million to invest.

“It’s become such a stampede that it’s created a real opportunity,” Reinoso said. “We’ve been more active in the past two months than we had been in the last 18 months.”

On Aug. 20, Reinoso bought Detroit School District notes maturing in a year with a yield of almost 4.4 percent, about 14- fold more than top-rated munis of similar duration, data compiled by Bloomberg show. The notes, rated SP-1, Standard & Poor’s second-highest grade, were issued through the Michigan Finance Authority, to be repaid with state-aid revenue.

It was the first debt sale by a Detroit issuer since the city sought court protection.

Looking Deeper

Looking past the negative headlines and “digging out situations that are extraordinary” gives investors higher yields on securities with a reliable repayment stream, Reinoso said. Such was the case with the school notes, he said.

“The principal and interest is already funded by the state,” Reinoso said. “So you’re not buying a Detroit school district, you’re buying the state of Michigan.”

Reinoso and Kuhn, the California investor, said they are focused on fixed principal and interest payments that they can collect tax-free rather than possible price changes of the debt.

A zero-coupon San Ysidro School District bond rated BBB-, one grade above junk, and maturing August 2034 last traded Aug. 29 with an average yield of about 6.6 percent, data compiled by Bloomberg show. The bonds are backed by Assured Guaranty Ltd.

For investors in the highest federal income-tax bracket of 39.6 percent, that’s a taxable-equivalent yield of almost 11 percent.