Municipal Bond Funds Fare Well in May

Well, these are anything but normal times, a fact underscored by the dominance of tax-exempt funds on the accompanying table of top open-end bond funds for May.

Muni bond funds enjoyed a bounce in May after being pressured for months by a variety of forces. Threats to their exemption to state income taxes have been disrupting the muni market for months, with the issued finally resolved in favor of the tax-exempt vehicles. If that weren't enough, the triple-A credit ratings of insurers of muni bonds have been in doubt as a result of the credit crunch.

Major insurers of muni bonds include: Ambac Financial Group(ABK - Cramer's Take - Stockpickr), MBIA(MBI -Cramer's Take - Stockpickr) and Financial Guaranty Insurance, whose largest holder is PMI Group(PMI -Cramer's Take - Stockpickr). Bond insurers guarantee roughly $2.4 trillion in debt.

Losses during the credit crunch, especially on collateralized-debt obligations secured by subprime mortgage-backed securities, resulted in threats to the credit ratings of the bond insurers. If their ratings were to be lowered, the bonds they insure would no longer share the high ratings of the insurers.

In addition to all that, many tax-exempt bond funds are leveraged, and turbulence in the auction-rate securities market earlier this year reflected negatively on their returns.

Of the seven muni members on the top-10-bond-fund list, six are managed by Eaton Vance Corp.(EV -Cramer's Take - Stockpickr).

The tax-exempt funds dominating the winners list are joined by two high-yield corporate bond funds, theHighland High Income Fund(HHIAX - Cramer's Take- Stockpickr) and the Oppenheimer Champion Income Fund(OPCHX - Cramer's Take - Stockpickr).

The top performing bond fund for May, the Rydex Series Inverse Governmanet Long Bond Strategy Fund(RYAQX - Cramer's Take - Stockpickr), jumped 3.40% in May, but has surrendered 7.74% over the past 12 months.