In recent months, fixed-income investors have often been told to stop anguishing over the low yields they are earning and to focus instead on the safety provided by certificates of deposit and other bank savings.

But more and more investors are trying to have it both ways, getting safety and enviable yields in the most humdrum of securities municipal bonds. Munis usually carry lower yields than comparable U.S. Treasury securities; today, many are paying more.

Munis, sold by states, counties and local governments to raise money for public projects, are definitely worth a look, but they’re not always as risk-free as people think they are.

From the start of the year through the end of May, the average municipal bond mutual fund had returned about 9 percent, according to Lipper, the market-tracking firm. That compares to an average of 6 percent for taxable bonds. Among those, funds owning U.S. Treasury bonds have been money losers.

Return is a combination of interest earnings, or yield, and the price gains (or losses) of the bonds owned by the funds. Bond prices rise when prevailing interest rates fall, since investors will pay more for older bonds that are more generous. Most of the muni gains this year have come from rising prices.

But the yields are nothing to sniff at. Many long-term muni funds yield more than 3.5 percent, and some more than 4 percent. Because their interest earnings are exempt from federal income tax, earning 4 percent on a muni is like earning 5.33 percent on a taxable bond, assuming a 25 percent tax bracket. Many munis are exempt from state and local taxes as well.

To convert muni yields to taxable equivalent, subtract your marginal tax rate from 1 and divide the muni yield by the result: 4 percent / (1 - .25) = 5.33 percent.

Munis prices have benefited from high demand as investors worry that stocks and corporate bonds are too risky. Munis are generally perceived to be safer than corporate bonds because they are backed by government taxing authority.

At the same time supplies of new munis have been somewhat tightened because potential issuers, worried that tax revenues are falling and that they must pay higher interest rates to borrow, have slowed the pace of muni sales.

Though muni funds have been doing well, the key question is whether they can keep it up.

Generally, munis have a very low default rate, meaning that the governmental bodies that issue them rarely fail to make the promised payments. But with the economy in recession, the risk of default rises, potentially damaging muni prices across the board. History shows that price drops can quickly chew away an entire year’s interest earnings.

Underscoring that risk, Moody’s Investors Service, the credit-rating agency, has warned that the creditworthiness of all local governments is in question.

You can avoid the problem of price fluctuations by purchasing individual munis and holding them to maturity. For guidance on this, check out the website of the Securities Industry and Financial Markets Association.

Mutual fund investors can minimize risk by picking muni funds with short “duration.” Every year of duration means the fund would lose 1 percent of its value if prevailing interest rates were to rise by 1 percentage point. A five-year duration, for example, means a 1-point rise in rates would cause a 5 percent loss in fund value. Morningstar (Stock Quote: MORN), the market-data firm, has duration figures on its fund Snapshot page.

Given the uncertainties, munis are probably not a great place to put cash you’ll need in the next year or two, though they could serve well as a long-term fixed-income holding.

The recent advice, to emphasize safety over yield, probably still holds, and investors should weigh munis’ risks and rewards against those of safe bank holdings. The average one-year CD yields about 1.3 percent, according to the BankingMyWay.com survey, while money market accounts average just under 0.5 percent.

But you can do considerably better by hunting around with the shopping tool. Some banks, eager to lure deposits, are paying more than 2 percent on 12-month CDs. AIG Bank (Stock Quote: AIG) has one at 2.46 percent. Bank of Internet (Stock Quote: BOFI) offers 2.06 percent on savings accounts.

Use the Certificate of Deposit calculator to figure how much you’d earn on fixed-income investments.

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