Of greater immediate concern are the legions of "revenue" bonds issued by quasi-state agencies on behalf of hospitals, colleges, airports and other self-supporting organizations. As the name implies, owners of these bonds can't turn to the taxpayer for help; principal and interest are paid out of the organization's revenues.

Given this added risk, I would sell any individual revenue bonds issued by the seven states listed above (or their subdivisions).

Favor Funds Over Single Bonds

More broadly, I think this is a time to avoid buying individual muni bonds, even from financially healthy states. Individual munis are always difficult to sell at a reasonable price, and a dealer's bid price (i.e., the price you would get if you decided to sell) can collapse if an individual issuer hits the skids.

For new money, I suggest tax-exempt mutual funds instead. With a no-load fund, you can sell anytime at the fund's net asset value. This type of liquidity is precious beyond words in today's world, where events from left field can hammer even seemingly safe investments.

My #1 sponsor of no-load muni funds is Vanguard. Not only does Vanguard consistently charge the lowest fees among bond funds, but you can also rely on the Vanguard management team to do careful credit analysis on the bonds they purchase.

At this point, I would favor Vanguard's national muni funds, rather than the single-state funds, for fresh cash. Geographical diversification (safety) is more important than getting an exemption from state income tax on your interest.

In addition, I would steer toward intermediate maturities rather than long-term bonds, just in case the mania for Treasuries reverses abruptly, with a spillover effect on long-term munis.

Your Best Best

Vanguard Intermediate-Term Tax-Exempt Fund (VWITX; 800/662-7447, $3,000 minimum), which features an average maturity of 6.9 years. Current yield: 3.49%. Monthly distributions.

Munis still have a role to play for investors in the top federal tax brackets (28% or above). But they're not a freebie. Look before you leap.

Richard E. Band, editor of Profitable Investing, is the newsletter world's #1 authority on investing for low-risk growth. His flagship Total Return Portfolio has tripled in value since its inception in 1990, while taking far less risk than the popular stock market index funds. Through good markets and bad, his recommendations for conservative investors have grown 798% since 1984. For details on how to join Profitable Investing risk-free for six months, click here now.