By Timothy Strauts

Municipal bonds had another good year in 2012 as interest rates continued to fall and, despite making a number of high profile headlines, municipal bankruptcies were contained. With interest rates on municipal bonds at 45-year lows, what can investors expect in 2013?

Fiscal Cliff
The "Fiscal Cliff" compromise answered the question as to whether interest on municipal bonds would be taxed in 2013. Municipal bonds avoided all the various proposals to eliminate or reduce their tax exemption. In fact, the increase in the top income tax rate to 39.6% from 35.0% may make tax-free municipals more attractive for some high income investors. After a sell-off in December the municipal market has rallied as investors have shaken off concerns about potential changes to muni bonds' tax treatment in the near term. But the tax status of municipal bonds is far from resolved in Congress.

Credit Quality

I have had many requests from subscribers to my free email service to develop a portfolio without individual stocks, that could generate strong enough income for retirement, by investing in a diversified portfolio of ETFs and Mutual Funds.

As most of my readers know, I am not a fan of most ETFs or mutual funds, simply because I cannot control the ownership of individual stocks, nor do I like the fees associated with them or the total returns that most generate. They also tend to have many overlapping holdings that could cause some over-allocation. That being said, I have put together a group of investments that could make sense for many more "passive" investors.

The majority of these investments are for income, and while the total returns can be positive, that is NOT what I have focused on.

3 ETFs And A Mutual Fund For Retirement Income

I looked for

We noted the pullback in financial default risk a couple of weeks ago, even in the face of a declining stock market. It's been awhile since we looked at state default risk, so below we highlight charts of 5-year CDS (credit default swaps) for four key states that saw default risk spike significantly in recent years -- New York, New Jersey, California and Illinois.

As shown, default risk for all four states has been trending lower all year, even when the stock market