Light These

State tobacco bonds may not be good for you--but they've made munis a buy

Tax-exempt investors tend to be a conservative bunch. So they may be excused for choking on the sudden sickliness of so-called state tobacco bonds. These unusual securities, whose prices have bucked wildly, are a small part of the $1.8 trillion U.S. municipal-bond market. But they've infected other bonds, boosting volatility and hurting prices. Yet some bargains have emerged.

Don't get hung up on the unique problems of tobacco bonds, which are state-issued debt backed by future payments of tobacco companies as part of a landmark 1998 liability settlement. States including California and New York have issued some $18 billion of these...

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