Municipal bond investors worried about the risk of default may be looking in the wrong direction.

Sure, investors were spooked by Meredith Whitney's prediction in December 2010 that the muni market would see hundreds of billions in losses. But now, they don't see what is actually a much greater risk on the horizon, according to Priscilla Hancock, a J.P. Morgan Asset Management client portfolio manager and fixed income strategist with a specialty in municipal bonds.

While the vast majority of traditional, plain-vanilla muni bonds carry virtually no risk of default, the real danger lurking in muni bonds comes from low-quality, high-yield municipal bonds, Hancock said Wednesday in a phone interview.

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