Key Takeaways:

• High-yield muni yields stay elevated, potentially offering rare above-average, tax-free income potential.
• Spreads remain stable and balanced, signaling healthy credit conditions across muni markets.
• After-tax yields beat corporates, giving investors strong income efficiency with lower risk.

How Municipal Bond Yields Look Relative to History

Municipal bond investors continue to find meaningful income opportunities. While interest rates have come down from their peaks, yields across the muni market remain attractive by historical standards. Strong credit fundamentals and steady demand have helped preserve that value even as the broader rate environment has shifted.

Within that landscape, high-yield municipal bonds stand out. Even as rates have eased, yields remain elevated relative to history, allowing investors to capture above-average income while maintaining exposure to an asset class with a strong credit record. After years of muted returns, the market has effectively reset, creating an income profile not seen in more than a decade.

Yields Remain Elevated Compared with History

High-yield muni yields have risen sharply since 2020, climbing from below 3% to around 5% and holding near those levels for much of the past two years. These elevated yields mark a sharp break from the low-rate years of the last cycle, giving investors a chance to lock in meaningful, tax-exempt income while the opportunity lasts.

In 2025, high-yield munis cheapened further for several sector-specific reasons. Their longer-dated maturity profile made them more sensitive to curve steepening mid-year, while renewed credit scrutiny in areas such as charter schools, private higher education, and senior living added to spread widening. Heavy new-issue supply, wider concessions, and bouts of risk-off sentiment in broader credit markets also created periodic volatility and attractive entry points.

Absolute Yields and Taxable Equivalent Yield

Source: ICE Data Indices as of 11/1/2025. This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities mentioned herein. Past performance not indicative of future results. Index performance is not representative of fund performance. It is not possible to invest directly in an index. See index definitions at end.

The chart above shows the taxable-equivalent yield (TEY), the yield a taxable bond would need to offer to match a muni’s after-tax income, based on a 37% federal tax bracket. On that basis, a 5% tax-free yield equates to roughly 8% taxable-equivalent income. Since mid-2024, the TEY on the ICE High Yield Municipal Bond Index has exceeded the yield on the ICE BofA U.S. High Yield Corporate Index, underscoring how high-yield munis continue to deliver competitive after-tax income with stronger credit quality and lower default risk.

Credit Spreads Reflect a Healthy Market

Credit Spread – HY Muni vs AAA Muni (Bps)

Source: ICE Data Indices as of 11/1/2025. Past performance is no guarantee of future results.

The spread between high-yield and AAA-rated municipal bonds currently sits near 1.66%, modestly above the four-year average of roughly 1.56%. This mild widening points to valuations that remain balanced, offering incremental yield advantage without suggesting any credit stress.

As the chart shows, spreads have fluctuated within a narrow range since 2021, tightening through periods of strong demand and widening briefly during heavier issuance or short-term volatility. The current level places high-yield munis in a steady, well-functioning market where investors continue to receive reasonable compensation for taking on additional credit exposure.

That steadiness stands out in a landscape where other credit sectors have shown greater variability. High-yield muni issuers, typically hospitals, housing authorities, and education-related projects, have demonstrated durable credit strength across cycles. With fundamentals solid and spreads sitting slightly above their recent average, the sector continues to offer appealing income potential without excessive risk.

The Power of Tax-Exempt Income

Nominal vs Taxable Equivalent Yields

Source: ICE Data as of 9/30/2025. For illustrative purposes only. Past performance is no guarantee of future results.

The chart above shows how tax treatment influences real income potential. With nominal yields holding near the upper end of recent ranges, the tax-exempt advantage of municipals remains substantial. When adjusted for taxes, municipal high yield offers a clearer edge in after-tax income compared with taxable high yield. For investors in higher brackets, that differential translates directly into retained income rather than return lost to taxes.

That efficiency helps keep municipal high yield competitive, even as broader interest rates have moderated. In an environment where nominal yields across sectors have converged, the ability to preserve more of what’s earned continues to set municipals apart.

Why Invest in High Yield Munis Now?

Yields remain elevated, spreads are stable, and municipal credit is on firm footing. Market fundamentals are well supported, with recession risks appearing contained and state and local issuers continuing to benefit from steady tax revenues and disciplined balance sheets. High issuance and temporary flow volatility earlier in the year helped cheapen valuations, leaving investors with more attractive entry points at today’s levels.

For investors seeking diversified exposure, VanEck’s High Yield Muni ETF (HYD) provides efficient access to this market through a single, liquid vehicle. With credit fundamentals intact and after-tax yields that continue to compare favorably to corporate high yield, high-yield munis offer one of the most balanced and tax-efficient sources of income available in fixed income today.

To receive more Municipal Bonds insights, sign up in our subscription center.