The interest subsidy more than makes up for the higher taxable yields issuers have to pay on the taxable market. According to Schechter, a 30-year highly rated BAB issuance yields around 6.40%. With the subsidy, the issuer's out-of-pocket expense is 4.15%, or about 50 basis points lower than tax-free municipal bond yields.

The federal government's involvement, however, doesn't improve the safety of these bonds. "One must still perform the same due diligence in buying BABs as one would do for any other municipal," explains Mallas.

However, a number of money managers saw value in these new bonds.  "Initial uncertainty that tends to accompany most new types of offerings resulted in BABs being lower priced, offering above average yields for equivalently rated taxable bonds," recalls Robert DiMella, co-portfolio manager of the $235 million MainStay Tax Free Bond Fund.  "And since their initial offering in March, these yield spreads have shrunk, generating double-digit price gains on these bonds."

Transparency
In the past, because default was generally regarded as highly unlikely with municipal debt, advisors may have thought little beyond the issuer's credit profile and what the bond was rated.

Greater market uncertainty has changed that perception. Investors are finding that researching municipals is more challenging than they ever surmised because of problems of timely disclosure and transparency as well as due to the increased complexity of many issues. Unlike corporate bonds, whose complete financials are released no more than six weeks after the end of each quarter, there is limited uniformity to the information provided by the 50,000-odd issuers of municipal bonds. Most tax-backed general obligations report only once a year, with audited financials released no earlier than six months after the fiscal year closes.
Reporting is better with specific activity revenue-based obligors who often provide quarterly data, observes Mitchell Savader, a municipal bond expert. But he adds that "these statements often vary in terms of breadth and detail, limiting the ability to contrast risk and value among bonds."

This is one of the reasons why, after working for more than a decade at a credit rating agency, Savader set up his own niche advisory firm in 2004. Savader Assets Advisors tracks about $6 billion in municipal bonds for various institutional clients, ranging from financial advisors to bond mutual funds, including INVESCO Aim and First Investors.

Though delays and deficiencies in municipal financial reporting limit certain analysis, Savader's custom reports help investors get a clearer picture of risk that municipal disclosure fails to address. He provides an overview and analysis of the particular type of municipal bond being tracked-general obligation versus revenue-backed industrial, educational or health-related issues. He then generates a financial profile of the issuer, along with a review of its management, debt position, the reporting transparency and the conditions and prospects of the local economy.

"The rating agencies generally do an adequate job in assessing a bond issue when it comes to market," says Savader, "but investors have little to go on after this initial review." Investors would not buy a corporate bond based on analysis done several years before. But without a dedicated research team, most municipal bond investors are doing just that, basing their decisions on historically low default rates and current valuations, rather than on the systemic risks.

"If we've learned anything from the financial crisis," says Tim Heaney, manager of the closed-end DTF Tax-Free Income Fund, "it's that no institution is too large to fail and nothing is impossible."

Heaney is less sanguine than many other observers who think that recent market stability reflects that largely fear had hit municipals. He sees many rainy day funds exhausted, one-off value coming from the federal government's stimulus package, and uncertainty surrounding political resolve to make additional budget cuts and tax increases to assure the servicing of municipal debt.