Why High Yield Munis Default Less Than Corporate High Yield

Key Takeaways:

• Muni default rates have been a fraction of corporate high yield default rates across every major credit cycle.
• The gap is driven by structural advantages: essential-service revenue streams, taxing authority, and political incentives to avoid default.
• Lower default rates combined with tax-exempt income make high yield munis a potentially attractive risk-adjusted income option, in VanEck's view.

The Default Rate Gap: Munis vs. Corporate High Yield

The historical record is clear: municipal bonds default far less frequently than corporate bonds, and the gap is especially wide in the high yield segment. Investment grade munis have a long-term cumulative default rate near 0.1%, while corporate high yield defaults have historically averaged 2% to 4% annually depending on the cycle (Source: Moody's Investors Service, "US Municipal Bond Defaults and Recoveries, 1970–2024," August 2025; Moody's Investors Service, Annual Default Study, 2025.)

Even in the high yield muni space, where credit quality is lower by definition, default rates remain well below corporate equivalents. This isn’t a coincidence. It reflects fundamental differences in what backs each type of bond.

Why Are Muni Default Rates Low?

Municipal issuers have structural advantages that most corporations don’t. Many muni bonds are backed by essential-service revenues like water, sewer, toll roads, and public power, services that generate steady cash flow regardless of economic conditions. Others are backed by the issuer’s taxing authority, giving them the ability to raise revenue to meet obligations.

There’s also a strong political incentive to avoid default. Municipalities that fail to pay bondholders face higher borrowing costs for years, which directly impacts their ability to fund public services. This creates a powerful motivation to prioritize debt service.

What Drives Corporate High Yield Defaults?

Corporate high yield issuers face a different set of pressures. Many carry significant leverage and depend on favorable credit markets to refinance maturing debt. When rates rise or credit conditions tighten, refinancing becomes more expensive or unavailable, pushing weaker issuers toward distress.

Corporate revenues are also more cyclical. A downturn in consumer spending, a shift in competitive dynamics, or a single operational misstep can erode cash flow quickly. Unlike municipalities, corporations can’t raise taxes or rely on essential-service monopolies to stabilize income.

High Yield Muni vs. Corporate Default Rates Across Credit Cycles

Source: Moody's Investors Service, "US Municipal Bond Defaults and Recoveries, 1970–2024," August 2025; Moody's Investors Service, Annual Default Study, 2025. For illustrative purposes only. Past performance is not indicative of future results.

Does Sector Matter Within High Yield Munis?

Yes. Not all muni sectors carry the same credit risk. Revenue bonds backed by essential services like water and sewer systems have some of the lowest default rates in the entire fixed income universe. Healthcare and senior living facilities tend to carry more risk, as their revenues depend on patient volumes and reimbursement rates.

Tobacco settlement bonds and certain special tax bonds also carry idiosyncratic risks. For investors accessing high yield munis through a fund, the sector mix of the portfolio matters for understanding the true credit profile.

What Do Lower Default Rates Mean for After-Tax Income in High Yield Munis?

Lower defaults mean more of the stated yield actually reaches the investor as income. In corporate high yield, a portion of the headline yield is effectively a credit risk premium that gets consumed by periodic defaults across the portfolio. In high yield munis, that drag is substantially smaller.

When you combine lower default losses with tax-exempt income, the after-tax, after-default return of high yield munis can match or exceed corporate high yield for investors in higher tax brackets, with less credit risk.

This is an illustrative example for educational purposes only. Actual results will vary based on individual tax circumstances, investment selection, and market conditions. Past performance does not guarantee future results.

How to Access High Yield Muni Exposure

The VanEck High Yield Muni ETF (HYD) tracks the ICE Broad High Yield Crossover Municipal Index, providing diversified exposure to the U.S. high yield, long-term, tax-exempt municipal bond market. For a shorter-duration option, the VanEck Short High Yield Muni ETF (SHYD) targets the 1 to 12 year maturity range within the same universe.

Both funds offer a straightforward way to access the structural credit advantages and tax-equivalent yield benefits of high yield munis.