it seems that municipal bonds (various cities, states, etc.) pay well and hardly ever default. *Is this a better choice than TIPS or equivalents? *It just seems that most States don't default and I could get a better rate or return (and with a little diversification) be relatively safe. *What are the thoughts of the members?
This is a good question. First, will you be in a high enough tax bracket that the municipal yields will be greater than the after tax yields of comparable non-indexed taxable bonds? If you anser no to this, go no further with the idea. If this question gets a yes, then ask yourself what your ideas on inflation are.
I expect inflation, so I would prefer TIPs or other indexed bonds. I think you have to go out pretty far to get a good yield on municipals, and then you are accepting a lot of interest rate risk at a time of historically low interest and inflation rates. Meanwhile we have a war, massive budget and trade deficits, a sinking dollar and a Federal Reserve that says it will drop dollars from helicopters if necessary to avoid deflation. To me, this is like the Big Bad Wolf saying I'll huff and I'll puff and I'll blow your house down. He wasn't kidding, and neither are Greenspan, Bernanke et al.
It doesn't seem like a good bet to me.