"It's become a negative-feedback loop," Thomas Metzold, co-director of municipal investments at Boston-based Eaton Vance Corp., said last week. "Funds have to sell bonds to meet redemptions, putting pressure on prices, causing more redemptions."

Money managers point to a strengthening economy and recovering tax revenue as signs that municipal yields will fall below Treasuries. California, Texas, Florida and New York, the four biggest states, all added jobs last month for the first time since May.

Concerns Overstated

The gains could help shrink budget deficits that the Center on Budget and Policy Priorities says will likely total $140 billion in fiscal 2012, as new jobholders boost income- and sales-tax collections. States' tax revenue grew about 6% in the three months ended on Sept. 30, the third consecutive increase, Goldman Sachs Group Inc. said Nov. 19.

Concerns about borrowers missing debt payments have been overstated, according to a report by Fitch Ratings on Nov. 16. Investment-grade municipal default rates were as low as 0.04% over the past 10 years, the report said.

"While the incidence of default may increase from exceedingly low historical levels, defaults will continue to be isolated situations," the report said. "There is a long record of governments making difficult choices to maintain budget balance while making full and timely debt service payments even in very stressful financial situations."

Three-Month High

Ten-year AAA general obligation bond yields reached 2.87% last week, according to Municipal Market Advisors data for that maturity. Yields on 10-year Treasuries touched a three- month high of 2.96% and were 2.86% as of 7:57 a.m. in New York.

Municipals are "a good place to pick up yield," said Andy Richman, who oversees $10 billion as a strategist in West Palm Beach, Florida, for SunTrust Bank's private wealth management division. "We don't think there will be massive defaults."

The ratio of municipal to Treasury yields rose above 100% for about three months starting in September 2002 and April 2003 before declining. In 2003, state and local bonds returned 6.18%, trouncing the 2.26% gain for Treasuries, according to Bank of America Merrill Lynch indexes.