Municipal bond exchange traded funds have been performing quite well over the past few years as investors sought yield options beyond Treasuries. However, muni bond investors should expect lower returns in 2013, according to BlackRock (BLK).

Peter Hayes, BlackRock's head of muni debt, expects municipal bonds to generate lower returns in 2013 than the prior two years, as yields hit a 47-year low, Bloomberg reports. Bond yield and price have an inverse relationship, so a falling yield corresponds with higher prices.

Yields on municipal debt have dropped as investors sought safe-haven diversification beyond Treasuries and a tax-free investment ahead of the federal tax increases.

According to the Bank of America Merrill Lync index, munis gained 18% in the last two years combined, the most since the 2000-2001 period.

Municipal bond investors "have been spoiled with some pretty robust total returns for an asset class that's not typically known

The government is reportedly scrutinizing the tax-exempt status on municipal bonds as it heads into the "fiscal cliff." However, disregarding the favorable tax treatment, muni bonds and exchange traded funds are still attractive investments.

Municipal bonds typically have higher yields compared to other taxable government bonds, and the credit quality will improve along with a strengthening economy, writes Deborah Levine for MarketWatch.

"With a reasonably favorable credit environment for municipalities, we still expect muni bonds will be the place to be," Matt Tucker, head of fixed income strategy at iShares, said in the article.

"The role you expect muni bonds to play in your portfolio should not be for capital appreciation, but to provide income and diversity," Tucker added.

Currently, the triple-A, 10-year munis yield about 1.76%, or about as much as Treasury yields, but they are more worthwhile for those in higher tax brackets. According to Bank

So you thought that the biggest fallout over higher taxes for the wealthy might be the selling of stock assets. Indeed, investors sitting on monster capital gains in Apple (AAPL) have liquidated scores of shares in the culture-changer company.

Yet a wide variety of riskier categories have held up nicely, including high yield corporate bonds, preferred stock, dividend stocks, consumer defensive and consumer cyclical stocks. Any selling in these categories is more attributable to fiscal cliff uncertainty than an actual outcome with higher tax rates for $250,000+ families.

Perhaps ironically, a safer haven area on the risk spectrum has taken a bit of a recent nose-dive. Muni Bond ETFs are experiencing uncharacteristic declines on speculation that U.S. leaders will agree to reduce income tax breaks on muni debt. (Is this what Republicans mean by “closing loopholes?”)

According to John D. McKinnon and Andrew Ackerman of The Wall Street Journal,