(FORTUNE Magazine) – Here's a cheerful earful for tax-shy investors: Dull old municipal bonds, which state and local governments issue to finance anything from airports to zoos, have taken on new sparkle. The after-tax yields on municipals, whose interest is usually exempt from federal tax, are higher in relation to taxables than they have been in a year and a half. Says Marshall B. Front, head of investment counseling at Stein Roe & Farnham in Chicago: ''The rule of thumb is that when the current yield on municipal bonds tops 90% of the current yield of Treasury securities, munis are a good buy.'' The average yield on long-term munis, counting both revenue and general-obligation bonds, is running at 7.51%, which clears the hurdle with room to spare. Mutual funds are the way to get in. Individual municipal bonds are usually sold in minimum denominations of $5,000, and the fine print may make them callable before maturity. Says Ian MacKinnon, head of fixed income for the Vanguard Group: ''Unless an investor has a great deal of money, it is extraordinarily difficult to diversify properly.'' A no-load fund, which doesn't charge a sales commission, puts the maximum amount of your money to work accruing tax-free interest. Top rated no-load funds over the past five years, according to CDA Investment Technologies of Rockville, Maryland, include the Steinroe Managed Municipal Fund, Denver's Financial Tax-Free Income Shares, Safeco Municipal Bond of Seattle, and the Vanguard Muncipal Bond High-Yield Portfolio in Valley Forge, Pennsylvania. Management fees for a typical no-load fund are 0.5% a year. Funds come in single-state varieties, which in addition to being exempt from Uncle Sam are also free of state and in some cases local taxes. The catch is that you must live in the state or municipality that issues the bond -- or move to Indiana. The Hoosier State does not tax the interest on any municipal issued in the U.S. ! The good buys may not last forever. Yields rose when a river of munis flooded the market. Commercial banks, historically the largest holders of munis, have been divesting their holdings because changes in the tax laws eliminated a deduction that had given banks a strong incentive to own tax- exempts. Adding rain to the flood, municipalities are taking on more debt and refinancing. Once the market manages to digest this huge helping, prices could rise and yields could fall.