Municipal bonds generated a positive return in each of the year's first 10 months, the longest streak in more than 20 years, as investors search for yield in a low interest-rate environment.

Munis have benefited from improved state and local government finances and the low default rate for municipal debt. The default rate totaled 0.1 percent for the first nine months of the year, down from 0.11 percent for all of 2013, according to S&P Dow Jones Indices.

Slim borrowing by cities and states has cut muni bond supply, while higher tax rates on the wealthy have made munis more attractive to individual investors, Paul Palmeri, head of the public-finance group at JPMorgan Chase, tells The Wall Street Journal.

"You have the perfect mix this year," he says.

Demand for munis has been increasing.

"Every deal that's priced appropriately gets plenty of interest," notes Daniel Solender, director of municipal-bond management at Lord Abbett & Co., which oversees about $16 billion in tax-exempt bonds. "Since it's been slow so long, there's pent up demand waiting."

The Barclays Municipal Bond index has returned 8.3 percent so far this year, compared with 4.1 percent for Treasurys and 11.3 percent for the S&P 500.

So far this year, investors have put $18.2 billion into municipal-bond funds, according to Lipper data cited by The Journal, compared with a withdrawal of $48.38 billion in the same period last year.

MarketWatch columnist Howard Gold recommends taking a look at munis. "Conservative investors need good yields. They need protection from higher taxes. And they need to know their principal is safe in a chaotic world," he writes.

"What offers the best combination of these three qualities? Municipal bonds, which can produce the equivalent of 3 percent to 5 percent taxable yields, with much less risk."

To be sure, the run-up in muni prices this year raises valuation questions, experts say.

"But if you already own munis, you should stick with what you own, because it's hard to replace that income," Jim Kochan, a senior investment strategist at Wells Fargo Advantage Funds, tells Barron's.

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