Banks ramped up purchases of municipal bonds in the first half of the year in the wake of federal legislation designed to stimulate banks' interest in state and local government debt.

Banks like to invest in municipal bonds, which under certain circumstances provide tax advantages, to protect profit from taxes and diversify their holdings. Banks owned $159 billion of municipals based on market value at the end of June, according to Highline Data LLC. That's a 7.9% leap from the end of 2008.

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