The credit market's woes are benefitting one group: buyers of municipal bonds, who have seen prices plunge and yields soar. Munis, some of which offer long-term tax-free yields topping 6%, have almost never looked so attractive, relative to U.S. Treasuries.

"The market is way undervalued," says Laura Milner, a portfolio manager at SCM Advisors in San Francisco. "It's more the result of liquidity than credit problems. You don't have to stretch in terms of credit quality to get high yields." She favors state general-obligation bonds and revenue bonds for essential services, like water and sewers.