As some believe an economic slowdown is approaching, many investors have begun bowing out of high-risk bonds in favor of more conservative investments. But when it comes to high-yield, high-risk municipal bonds, investors continue to rush in, according to The Wall Street Journal.

Although these bond funds are essentially equivalent to corporate junk, they represent a $100 billion market. Unlike other municipal bonds, payment on these high-yield munis is not guaranteed by tax receipts. They often fund projects such as airports or health-care sites, and typically yield between 5% and 7%, tax-free.

"Everybody out there is hungry for the yield," said Richard Larkin, who runs municipal research at J.B. Hanauer & Co. in New Jersey.  

By the end of July, assets in high-yield municipal funds had risen 10% for the year to $51 billion, according to AMG Data Services in Arcada, Calif.  Nuveen Investments, for one, grew 20% in the first seven months of 2006.

Nuveen portfolio manager John Miller credits returns that outpaced trudging interest rates in the second quarter.

To meet high demand, mutual fund companies have been engineering new products to further entice investors

Pimco opened a new high-yield fund this month. Manager John Cummings said he plans to take a conservative approach, closely analyzing credit and looking for opportunities.

OppenheimerFunds' top-performing Rochester National Muni is launching seven separate single-state products.

Cynthia Clemson, co-director of municipal investments at Eaton Vance, warned against over-exuberance. 

"You could get to the point where high-yield funds are yielding pretty much the same as other funds, and shareholders at that point ask, 'Why am I taking all this risk?'"

"I'm not predicting a meltdown. I'm  just saying you have to be very selective," she said.

The staff of Money Management Executive ("MME") has prepared these capsule summaries based on reports published by the news sources to which they are attributed. Those news sources are not associated with MME, and have not prepared, sponsored, endorsed, or approved these summaries.

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