I don't know about you, but I'm not earning much interest at the bank these days...

Fortunately, an extraordinary "return-on-your-cash" alternative has come up in the last month...

It's not a new investment vehicle... It's an old asset, where the opportunity has never been this good. I crunched the numbers, and I discovered we now have the best opportunity to buy in the 50-year history of this asset.

Right now, my savings account pays me less than 3% interest. At that rate, $10,000 would earn you less than $300 in interest in the course of a year. Then, of course, you also have to factor in income taxes on that $300...

So after taxes, you'll pocket less than $200 on a $10,000 investment over a full year. It's abysmal. So what can you safely do? You could tie your money up for a longer period of time... But 10-year Treasury bonds are only paying about 3.7%. And again, after taxes, you're down to, well, not much. So what can you do?

You should consider buying tax-free municipal bonds.

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Right now, super safe, tax-free municipal bonds pay more interest than taxable treasury bonds. This is crazy.

Under "normal" circumstances, a tax-free investment should pay much less interest than a taxable one. For example, if you can earn taxable interest of 6%, then after income tax, you'd pocket about 4%. So if you could earn tax-free interest elsewhere, your "break even" interest rate would be about 4%. Said another way, interest of 6% taxable and 4% tax-free (at a 33% tax rate for this example) should be thought of as identical.

Interestingly, this is not the case at all today.

Thanks to the credit crunch, hedge funds sold their positions in municipal bonds about two months ago. Legendary fund manager Bill Gross started buying munis in March – by the billions. "When you can get a non-taxable security at the same rate as a basically taxable security, then you've got a bargain," Gross said.

Another legendary value investor – Wilbur Ross – also bought a billion dollars worth.

Despite this buying, the anomaly is still here. Tax-free municipal bonds still pay more interest than taxable Treasuries. At the bottom of the market last month, the spread was the widest in history. Take a look:

The big anomaly

As I've told readers before, this anomaly always sorts itself out in one of two ways: 1) Either regular government bond prices must crash while municipal bonds stay flat. Or 2) Municipal bond prices must soar. Either way, you'll do extremely well by holding a portfolio of municipal bonds.

Municipal bonds are safe... The cumulative default rate on municipal bonds from 1970 to 2000 (the only numbers I have) was 0.04%. And that number is for all municipal bonds, not just the highest-rated, AAA ones.

Municipal bond prices fell recently. But the uptrend is back.

Tax-Free Income on Your Safe Money The Making of An Investment Superhero

You can invest extremely safely in boring municipal bond funds from companies like Vanguard. Or you can significantly increase your tax-free yields by going with a closed-end municipal bond fund. I currently recommend two municipal bond funds to True Wealth subscribers. You can sort through a list of them at www.etfconnect.com.

As I've said to True Wealth readers... between the tax-free interest and the capital gains I expect as the anomaly sorts itself out, you should be able to pick up double-digit total returns here over 12 months. Safe, double-digit annual returns on your cash, tax-free, is hard to beat.

Good investing,

Steve

P.S. You can learn more about my top two fund ideas with a subscription to True Wealth. To learn more about joining up, click here. (The tax-free interest you earn this year will easily pay for the subscription!)