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Charles Sandmel, AIF®, CFP® | Portfolio Manager | with Anne Lawson
From a distance, the planet looks blue. Up close, it’s a different story.

The bond markets turned in a respectable quarter, if you look at the Lehman Aggregate return of 2.14%. Within the Aggregate, different bond classes had widely varying results.

The U.S. Treasury Bond Index gained 4.43%, while the U.S. High Yield Index lost 3.02%. The Municipal Bond Index lost 0.61%.

For the first time in memory, AAA municipal bond yields were greater than U.S. Treasury yields for all maturities, despite the benefit of tax exemption. The reason is not that municipal bonds as a class have become significantly riskier, but that demand for the safety of U.S. Treasury securities has overwhelmed other considerations.

The subprime mortgage-backed securities debacle has indirectly caused weakness in the municipal bond market. Roughly 50% of all municipal bonds carry bond insurance, a layer of protection above and beyond the issuer’s own creditworthiness. Until recently, the credit quality of the bond insurers was AAA, but as the value of mortgage assets deteriorated, the insuring of mortgage-related structured securities pulled down ratings and the value of bond insurance.

The result: insured bonds are now being evaluated on the basis of their uninsured quality. The fundamental quality of municipal bonds—99% of which are investment grade (BBB or better)—is not affected by the downgrade of a bond insurer.

For the average investor, these relative value relationships between different types of bonds are interesting, but not a great trading opportunity.

Bonds and Social Screens
As socially conscious investors, it’s important to consider what is built with our bond investments and what revenue streams secure their repayment. We prefer financing socially valuable efforts such as public education, clean water, housing assistance, clean power, and mass transit.

We prefer not to fund destructive activities such as coal-fired utilities, urban sprawl, privatized public services, and prisons. Our credit judgment tends to keep us away from private hospitals, nursing homes, casinos, and bonds supported by tobacco settlement revenues. We also avoid complex structures—the simpler a bond, the fewer opportunities for failure.

Charles Sandmel is a First Affirmative Investment Advisory Representative. A 30-year veteran portfolio manager and past Director of the National Federation of Municipal Analysts, Charles manages separate fixed-income accounts for First Affirmative clients. Anne Lawson, a 16 year veteran credit analyst, performs securities analysis and assists in portfolio management. All yields and spreads mentioned in this Market Commentary are retrospective and subject to change.

Charles Sandmel is a First Affirmative Investment Advisory Representative. A 30-year veteran portfolio manager and past Director of the National Federation of Municipal Analysts, Charles manages separate fixed income accounts for First Affirmative clients. All yields and spreads mentioned in this Market Commentary are retrospective and subject to change.