Just because Jefferson County's finances are in the sewer doesn't mean the municipal bonds issued by Alabama's largest county are going down the drain.

As a disastrous $3.2 billion effort to overhaul county sewer systems pushes the county toward possible bankruptcy, bond investors appear to have bet that no matter what happens, they will get paid. The market response to an ongoing crisis that's drawn attention to the potential crisis in municipal bonds appears to show that investors believe the system is still working, at least for now.

Prices of one of a $55.5 million series of rated municipal bonds yielding 4.0%, a $4.4 million issue from 2003, have rebounded sharply since a trough last fall. The bond s price had dipped to 68.19 to the dollar in an Oct. 29 sale, with a yield of 22.57%, according to the Electronic Municipal Market Access site, operated by the Municipal Securities Rulemaking Board, the federal regulator of broker-dealers and banks that market, trade and underwrite municipal bonds. By Wednesday, the same issue traded at 87.62, and the yield on the still imperiled bond was down to 12.65%. Most of the bonds in the series are trading around the same level.

As muni bonds go, this one remains a very risky security, but mutual fund companies and institutional investors who own the bonds say the price jump suggests conditions are looking up.

"That's a pretty substantial improvement," said Mitchell Savader, CEO of Savader Asset Advisors, a municipal bond-research firm in New York. He said he hasn't tracked the bond issued by the Alabama Water Pollution Control Authority, but said the price and yield shifts likely indicated some belief that a long-running crisis is edging back from the abyss.

In 1995, Jefferson County, home to Birmingham, Alabama's largest city, began to overhaul its sewer system, a project some initial estimates tabbed at $250 million. A series of controversial political moves resulted in an ill-advised shift to variable-rate bonds and complex interest-rate swaps in 2002 and 2003. The 2008 economic collapse ballooned the cost of the project to $3.2 billion. The swaps eventually drove the county's interest rate from 3% to 10%, and made payments nearly impossible. Moody's, which had given these bonds an Aaa rating in 2003, dropped its rating to junk status. The county moved into technical default on March 7, 2008, when it failed to post collateral for its debt.

The debacle raised the specter of bankruptcy and the ensuing investigations eventually landed former county commission president and Birmingham Mayor Larry Langford a 15-year prison sentence. Another 20 defendants were also convicted after extensive federal investigations into corruption issues around the sewer bonds.

The tangle of litigation and investigation that ensued nearly defies description. JPMorgan, Bank of America, Bear Stearns, and Lehman Brothers charged Jefferson County about $50 million above prevailing prices for 11 of the interest-rate swaps the county bought between 2001 and 2004. In 2009, JPMorgan paid a $50 million settlement and scuttled a $647 million claim for termination fees.

No one from the Jefferson County finance office was available to comment for this story, but Jefferson County Commission President Bettye Fine Collins on Wednesday told the Birmingham News she believes the longstanding crisis can be solved before four of its members leave office in November. The county last week hired Jeff Hager, chief financial officer of Montgomery aircraft parts maker Kelly Aerospace, to fill its own CFO job, which had been vacant since 2007.

A June 17 trade, the day of Hager's hiring, pushed the bonds up to 88 and the yield down to 12.25%. The redoubled governmental effort won't necessarily solve the crippling debt crisis, but the market can react to related events.

"This could be due to a fundamental change in the underlying credit," Savader said. "Prices can changes because of moves by the local jurisdiction or the state to better the interests of bondholders."

Since bond owners sit at the head of the line for repayment, the price hike could signal growing belief that Jefferson County is leaning against declaring bankruptcy, which would have longstanding repercussions on its ability to borrow money in the future.

James Spiotto, a Chicago-based bankruptcy attorney, said that bankruptcy is the absolute last resort for even the most financially strapped government because municipalities rely on their credibility to fund local projects.

"Other cities that have had problems have mostly found other ways to ensure that bondholders get paid," he said, using the 1994 default by Orange County as an example. "While bondholders suffered a delay, they ultimately got paid."