Sure, sure. I’ve seen the headlines, too. “Investors Panic Out of Municipal Bonds” was an early one back in November. “$2 Trillion Municipal Bond Debt Crisis” was another. And on and on, right down to Lipper’s report in early April that frightened shareholders have pulled money out of municipal bond funds for 21 weeks in a row, swelling the cumulative withdrawals to $30.8 billion.

I feel sorry for the terrified hordes. In their rush for the cliff, they missed a couple of road signs.

First, tax-free bond prices stopped falling in mid-January. The average long-dated muni has bounced about three points since then. Somebody is buying those bonds mom and pop were dumping.

Most likely, somebody smart, with deep pockets. Even more significant, perhaps: The wave of muni defaults predicted by the bears still hasn’t made its appearance. Through the first quarter of 2011, muni defaults are running 50% below 2010’s pace.

Recall that, in December, celebrity analyst Meredith Whitney went on “60 Minutes” to forecast “50 to 100” sizable muni defaults, totaling “hundreds of billions of dollars,” starting in 2011.

Unless the dam breaks soon, Whitney’s timing, at the very least, will prove to have been faulty.

Meanwhile, according to the Nelson A. Rockefeller Institute of Government, state tax revenue increased every quarter of 2010, culminating in a 6.7% jump in the fourth period. Granted, local tax collections haven’t snapped back as smartly, thanks to the

lingering depression in property values. However, the Census Bureau says total local revenues (including property, sales, income and other taxes) grew 1.6% in Q4. State and local governments aren’t sliding into a bottomless pit — not right now, anyway.

Favor the Healthy States

With the muni market stabilizing, I’m shifting to a slightly more conservative bond-buying strategy. I suggest concentrating on the states with the healthiest credit ratings.

Normally, spreading your exposure across the country is the best approach for investors in tax-exempt bonds (unless you live in a state with an extremely high income tax, like California or New York). Nationwide diversification lessens your risk.

Looking out two to five years, however, I foresee the likelihood of another recession. If, within that time frame, the national economy were to skid again, some states wouldn’t be in a particularly strong position to come to the aid of troubled local governments.

We don’t know how long the current business upswing will last. However, we do know it’s already 21 months old. As the economic cycle matures, we want to tilt our portfolios more and more toward the safest securities, stocks as well as bonds — exactly the opposite of what the crowd does when it starts to feel the wind at its back.

Eight for the Honor Roll

Who are the safest bond issuers, at the state level?

Only eight states possess the coveted AAA rating from all three nationally recognized agencies (Moody’s, Standard & Poor’s and Fitch). Although the rating agencies’ opinion is no guarantee against default, these firms have analyzed municipal debt for decades, basing their judgments, for the most part, on hard dollars-and-cents numbers.

A unanimous AAA rating suggests that, of all 50 states, these eight are the most likely to have enough financial clout to honor their obligations, come what may. (Oh, and by the way, the S&P revision of its U.S. credit outlook to negative from stable, does not apply to ratings on state and local governments.)

The honor roll, in alphabetical order:

1. Delaware
2. Georgia
3. Iowa
4. Maryland
5. Missouri
6. North Carolina
7. Utah
8. Virginia

My favorite way to tap the financial strength of these states is through single-state municipal funds. As it happens, the Nuveen organization sponsors closed-end funds that invest exclusively in bonds issued by several of the honor-roll states (together with county and city governments within each state).

Listed on major exchanges, these Nuveen funds use borrowed money (leverage) to purchase additional bonds — and sweeten your yield. Leverage causes the funds’ share price to fluctuate more widely than, say, a plain-vanilla open-end mutual fund. Over longer periods, though, the higher yields on these funds tend to generate a somewhat richer total return than you might expect from an open-end fund.

The table below gives pertinent data on the four Nuveen single-state funds I’m recommending now.

As you can see, current tax-free yields range as high as 5.8%. For a taxpayer in the top (35%) federal bracket, that’s the equivalent of a taxable bond yielding 8.9%. What’s more, the taxable-equivalent yield is even higher if you’re lucky enough to live in the state where the bonds are issued — because then, you can take advantage of the exemption from state and local income tax, too.

NAV=net asset value. Shares of closed-end funds can trade in the open market above or below the value of the securities in their portfolio.

The four of the funds I’ve listed are fairly small, so it’s essential, when buying, that you place a limit order (specifying the maximum price you’ll pay).