With higher taxes all but certain, investors are trying to find ways to soften the blow. Interest in municipal bonds has grown considerably over the last few years, as the bonds main appeal is tax-free income. Munis are exempt from federal taxes as well as state tax in the state of issuance. By contrast, Treasuries are only free from state and local taxes. Generally, investors in the top three tax brackets will do better in municipal bonds rather than buying a similar Treasury issue and paying the tax [for more municipal bond analysis sign up for a free account].

However, despite the fact that there are over 1 million different individual municipal bonds outstanding--totaling approximately $3.7 trillion in principal--the average daily trading volume in 2011 was just $11.3 billion. That s pretty paltry considering a stock like Bank of America (NYSE: BAC) trades roughly $2 billion worth of shares each day. About 99% of outstanding municipal securities do not trade on any given day, and only 15% of municipal securities trade in the second month after issuance. For investors looking to add exposure to individual munis, this relatively illiquid market makes it difficult to build meaningful positions.

That s why focusing on some of the more liquid bonds could have appeal:

University Of Wisconsin Hospitals And Clinics Authority Revenue Bonds (CUSIP: 915260CD3)

One of the most heavily traded muni bonds, according to the Municipal Securities Rulemaking Board (MSRB), comes from the University of Wisconsin s Hospital system. According to the MSRB, the munis- which recently received a credit upgrade to Aa3 from A1 from Moody s--traded nearly 2142 times since their recent issuance. Both individual investors as well as institutional-sized orders were placed. That s a good indication that the bonds could keep the cash flowing, despite doubling UWHC's debt load.

The $262,675,000 in issuance will be used for general corporate purposes at Wisconsin's only academic medical center. The bonds have a coupon of 4% [see 15 Counties Worth Investing In].

PUERTO RICO Electric Power Authority Power Revenue Series NN (CUSIP: 74526QAR3)

Given its relationship with the United States, Puerto Rico offers municipal bonds for stateside investors and has been used as a source of extra yield for many portfolios. As such, Puerto Rico's bonds often make the top traded lists. With a rating of Baa2 from Moody s, the bonds have swiftly changed hands roughly 4882 since 2006 - the earliest date for MSRB data. However, that still is quite a turnover for the normally sleepy sector.

PREPA owns and operates electric generating and distribution facilities serving all of Puerto Rico, and the revenue bonds are payable from the Authority's net revenues that are derived from charges for electric services. The bonds have an interest rate of 4.75%.

New York N.Y. City Municipal Water Finance Authority Water & Sewer 2nd Gen-Fiscal 2013 (CUSIP: 64972GBN3)

As one of the states with the highest tax burdens, New York is often a fertile ground for heavily traded muni bonds as investors in the state try to curb these high taxes. As such, the AA+ plus Fitch rated, New York City Municipal Water Finance Authority Water & Sewer bonds have had a robust trading history. Over the last 30 days, MSRB data shows that there have been some big transactions moving hundreds of these bonds - including some in the $500,000 range [see 5 Largest Municipal Bond ETFs].

The $57,375,000 in bonds will be used to pay principal and interest on a portion of the Authority s outstanding commercial paper notes and to pay the costs of improvements to the water system. The bond is backed by the revenue generated by the water system s approximately 836,000 accounts in the city, which provides 1,010 million gallons of water per day. The bonds have an interest rate of 3.75%.

Alameda Corridor Transportation Authority REV-REF-SR LIEN-Series A (CUSIP: 010869GK5)

Like New York, California features high taxes and swift muni bond issuance; this also means its bonds are some of the most heavily traded. Alameda Corridor Transportation Authority s latest bonds traded 82 times as of the second week of March.

The Alameda Corridor is located in southern Los Angeles, running from the ports of Long Beach and Los Angeles about 20 miles to downtown L.A. The various railroads that use the corridor are required to pay usage fees, which form the basis of the revenue that will pay for the bonds. On average, 44 trains move through the corridor a day and Alameda makes about $8.8 million in usage fees. The bonds are secured via a potential lien on the corridors trust estate. The munis carry an interest rate of 3%.

The Bottom Line

By choosing these bonds, investors have the ability to reduce trading costs via lower bid/ask spreads, as well as reducing the chance of overpaying a bond. Overpaying for a bond of any kind reduces its interest rate and the amount of principal gains received back by investors when the bond matures. Likewise, the more a bond trades also increases the likelihood that investors will be able to create a full position size - even if it does take them a few trades. Finally, while it can t be used a predictor of default or creditworthiness, the more heavily traded the security is, the higher its credit is because more investors clamor for these safer muni bonds.