Are High-Yield Municipal Bonds 'High Yield' Or 'Junk'?

By Cooper J. Howard
There's an old joke in the bond market: "What's the difference between a high-yield bond and a junk bond?" "It's high yield when you buy it, but junk when you sell it!" Since high-yield munis - those that are rated below Baa3/BBB-, or not rated at all - were one of the best-performing bond sectors in 2018, should investors consider them more "junk" or more "high yield" today?
High-yield munis were among the best-performing fixed income asset classes in 2018

Source: Bloomberg, total returns from 12/29/2017 to 12/31/2018. See disclosures for a list of indexes used. Past performance is no guarantee of future results.
We think the answer falls somewhere in the middle, but we are more cautious on high-yield munis today than we have been in the past. A small allocation to high-yield munis can make sense for more aggressive muni investors today, but if you already have a position we would caution against adding to it.
High-yield munis generally pay higher yields, but yields today are low Lower credit ratings mean high-yield bond issuers are considered more vulnerable to missing interest payments or even failing to repay principal. In exchange for the increased risks, yields for high-yield munis are usually greater than yields for investment-grade munis. For example, the recent yield for a high-yield muni benchmark was just over 5%, compared with 2.7% for investment-grade munis.1
While a... Read more