Taxable municipals are still an oddity in the marketplace. According to Moodys, taxable municipal bonds represent only 6% of the outstanding municipal bonds in the market. As of the 2007 year end, the municipal bond market totaled approximately $2.5 trillion, which implies that there were almost $150 billion worth of taxable municipals in the market.

Although taxable municipals are hard to find, their safety record is admirable, especially versus corporate bonds which are the main alternative investment for fixed income buyers. Historical default rates on taxable municipals are far less than on corporate bonds. In a 30 year study, Moodys found that no AAA rated taxable municipal bond defaulted, while 0.68% of AAA rated corporate bonds defaulted. Moodys found that 0.03% of AA rated taxable municipals defaulted, while 0.80% of AA rated corporate bonds defaulted...and only 0.01% of A rated taxable municipal bonds defaulted while 1.46% of A rated corporate bonds defaulted. In addition, the report showed that at each rating level, taxable municipals tend to yield slightly more than corporate bonds. Lastly, Moodys found that taxable municipals tend to be slightly less volatile than corporate bonds.

As Blue Haven Capital strives to diversify portfolios, where appropriate we will buy select taxable municipal bonds to add an additional level of diversification, safety and stability to the portfolios we manage.

Municipal Housing Bonds

On July 30, 2008, President Bush signed the Housing and Economic Recovery Act of 2008.The bill raises each state's bond cap for housing bonds by over 38%, and it exempts new money housing bonds from being subject to AMT. The purpose of the bill was to give those individuals who got private issuer mortgages a chance to go into a state housing authority mortgage and escape the often predatory mortgages that many subprime lenders issued. Most state housing agencies now offer only 30 year, fixed rate loans whereas many of the subprime loans were interest-only, floating rate, or balloon.

This new supply of non AMT municipal housing bonds should create a nice opportunity for buying in an already attractive area. Yields on non AMT municipal housing bonds are almost 1% higher than on municipal non housing bonds. The state level housing agencies often have very strict lending guidelines, very straight-forward loans, and often the mortgages themselves are backed by the United States government. Since municipal yields are equivalent to, or even higher than, government yields, Blue Haven Capital recommends that all who pay income taxes take a hard look at municipal housing bonds. We like the combination of safety and yield that state level housing agencies provide, and we are eager to see what comes into the market in the coming months.