Municipal Bonds Are In Freefall: Why High-Yield Munis Lost The Investor Love

High-yield municipal bonds are getting hammered. We’re talking worst performance since 2008 kind of bad.

The Numbers Are Brutal

Three major muni ETFs are all underwater this year:

• VanEck Vectors High Yield Muni ETF (HYD): Down 10.8%
• SPDR Nuveen S&P High Yield Municipal Bond ETF (HYMB): Down 11.0%
• BlackRock High Yield Muni Income Bond ETF (HYMU): Down 11.9%

The broader speculative-grade muni market is already down 9.3% year-to-date. To put that in perspective, this segment is underperforming both investment-grade munis AND high-yield corporate bonds. That’s… not great.

What Changed?

Just last year, high-yield munis were the golden child. They returned ~8% in 2021 and made a solid case for diversification. Investors loved them as a haven asset.

Then everything flipped.

The culprit? Demand reversals. Muni funds have been bleeding capital for the past 10 weeks. Lipper data shows roughly $3.5 billion got yanked from muni mutual funds in a single week (ended April 20) alone. That’s multi-billion dollar outflows becoming the new normal.

The Real Problem: Dependency on Hype

According to Municipal Market Analytics, high-yield munis had become “unduly dependent on excessive demand versus supply.” Translation: The market was running on fumes and sentiment, not fundamentals.

As Matt Fabian put it: “In the prior world, where bonds were scarce, it was doing really well.” Now? Scarcity’s gone.

More Pain Incoming?

Here’s the uncomfortable part. Senior portfolio managers at Federated Investment warn this might not be the bottom. Expect cascading selling as investors lock in losses. Once that domino falls, weakness spreads across the entire credit spectrum.

The lesson: When an asset class gets too crowded on momentum alone, the exit can get nasty fast.