High-yield munis return 1.67% YTD as investment grade slips

High-yield municipal bonds returned 1.67% year to date, while AAA munis fell 1.09% and the Municipal Aggregate index lost 0.71%, according to Nuveen's Muni Minute commentary as reported by ETF Trends. The divergence sits inside a broad October rebound: the Bloomberg Municipal Bond Index gained 3.62%, its best month since November 2023.

Weekly issuance dropped to $9.2 billion as issuers took a wait-and-see approach ahead of the Federal Reserve meeting and the midterm election cycles, letting cash-heavy buyers clear paper quickly, according to the commentary. Benchmark two-year and 10-year muni yields fell 7 and 8 basis points, and the spread between 10-year and 30-year paper reached 139 basis points, leaving short-dated bonds relatively expensive and long-dated bonds at attractive relative value, according to the report. The 30-year muni-to-Treasury ratio settled at 91%, near its 92% historical norm, a level the commentary says gives top-bracket taxpayers a 30-year taxable-equivalent yield of 8.16%.

For advisors, the choice is the wrapper: an active fund holding lower-rated credits past 10 years, or a passive fund tracking the same segment. High-yield muni funds lost $546 million in the latest week, a sixth consecutive week of outflows, while the commentary points to a rotation from mutual funds into ETFs that tax-loss harvesting has bolstered.

Nuveen's High Yield Municipal Income ETF (NHYM) is the commentary's actively managed example, with lower-rated and non-rated credits, an effective maturity above 10 years, tax-exempt cash flow and no corporate default exposure. The passive alternatives it names are the VanEck Short High Yield Muni ETF (SHYD) and the SPDR Nuveen Bloomberg High Yield Municipal Bond ETF (HYMB). The commentary describes NHYM's long maturity profile as a way to capture elevated yields down the curve, at a point when it calls long-dated paper attractive relative value and short-dated paper relatively expensive.