Last year was supposed to be the municipal bond market's Armageddon. Yet the year ended not with the wave of defaults that many predicted, but the types of returns of which other asset classes could only dream.

Sure, municipalities are still under severe financial strain. The lukewarm economy continues to sputter, but the defaults never materialized. Investors have returned to munis in the last 12 months based largely on the strong gains. The typical fund in the intermediate municipal category returned 9% in 2011, according to Morningstar. The S&P 500 posted just a 2% gain.

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