After declining more than 10% since the beginning of October, municipal bonds partially recovered last week.

Municipal bond prices had been hurt by concerns over mounting government budget deficits, declining tax revenue and sales by money managers to meet redemption requests.

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Historically, muni bonds have had better credit performance than corporate debt, and overall muni default rates remained very low even during the Great Depression.

Last week, investor confidence returned and municipal bond prices surged in what one Wall Street Journalarticle described as a “feeding frenzy”.

The true test of whether the market for municipal bonds is unlocked will prove out over the next month as more than $19 billion of new municipal debt comes to market.

To invest in municipal bonds with ETFs, check out the S&P National Municipal Bond Fund (MUB) which owns investment grade tax-exempt bonds issued by state and local governments and agencies.  The SPDR Barclays Capital Municipal Bond ETF (TFI) owns long term tax-exempt bonds including general obligation, revenue, pre-refunded and insured issues.

ETFs that specialize in single state municipal bonds are also available for California and New York.

See the ETF Directory for a complete listing of Tax-Exempt Fixed Income ETFs.