(MONEY Magazine) – Ever invested in an oxymoron? Well, it may be time to put some money into one: taxable municipal bonds. You read it right. Taxable munis. Ten-year taxable munis are paying 6.8% to 7.4% now, making them especially appealing to taxpayers in the 15% and 28% brackets. On a pretax basis, a 10-year triple-A taxable muni pays a 15% taxpayer more than a percentage point in extra yield over comparable tax-free munis. They're also yielding a point or so more than Treasuries of similar maturity (lately yielding 5.9%).

Taxable munis are the little-known, seldom-traded orphans of the bond world, created back in 1986 when revenue-hungry legislators zapped the federal tax exemption granted to certain munis. Example: bonds floated to pay for racetracks and stadium skyboxes, such as the luxury suites at Baltimore's Camden Yards (below). But Congress didn't take away all the bonds' tax bennies: Their income remains exempt from state and local tax for residents of the state in which the bonds were issued. That can add another half a point or so to a bond's after-tax yield for people who live in such high-tax states as Maryland, New York and Wisconsin.

By and large, taxable munis are safer than corporate bonds, according to Andrew Nybo, director of market statistics for the Public Securities Association. "The default rate for all municipal securities is 0.5%, while that of corporate bonds is over 2%." Even so, you should stick with insured bonds or those rated double A or better by Standard & Poor's and Moody's. One example from Pennsylvania: triple-A-rated Allegheny County Redevelopment Authority (callable on Sept. 1, 2007; selling at $102 for each $100 of face value), recently yielding 6.8%.

One disadvantage of taxable munis is that, like most other bonds, they rarely trade in increments of less than $10,000. So you might consider the $7 million Lebenthal Taxable Municipal Bond Fund (4.5% load; yielding 7.3%; $1,000 minimum; 800-221-5822). It has returned 15.8% so far this year, vs. 11% for the average tax-free muni fund and 11.4% for corporate funds--a gain that will make you feel more like an ox than a moron.

--Duff McDonald