Key Takeaways:

• Most high-yield muni issuance is long-dated, making short maturities under 10 years rare. Limited supply and investors holding to maturity make them even harder to access.
• Short HY munis currently deliver about 290 basis points of extra tax-equivalent yield over short IG munis. They provide higher income without meaningfully extending duration.
• Short HY munis remain undervalued but rising demand could drive spread compression. The unusually steep muni 2s10s curve also presents a relative value opportunity in the 1-12 year segment.

SHYD: Efficient Access to Hard-to-Access HY Munis

The municipal high-yield market is predominantly composed of long-dated bonds, with maturities often extending 20 years or more. This structure reflects the nature of the projects being financed-such as infrastructure, transportation, healthcare and development-which inherently require long-term funding. Given the speculative profile of high-yield issuers, locking in financing over extended horizons is generally preferred, making shorter-dated issuance far less common.

As a result, high-yield (HY) municipal bonds with maturities under 10 years remain scarce. Issuers rarely bring such deals to market, as longer amortization schedules better align with project cash flows and provide greater flexibility for refinancing or restructuring. In the secondary market, the limited supply is compounded by investor behavior: those who hold short-dated HY paper often keep it to maturity, as it offers attractive near-term yield without committing capital for decades. This dynamic restricts turnover and makes sourcing short HY bonds particularly challenging.

In this environment, the VanEck Short High Yield Muni ETF (SHYD) stands out as an efficient vehicle for accessing a segment of the municipal market that is both scarce and difficult to source directly. By providing diversified exposure to over 220 unique obligors rated BBB+ or below, SHYD enables investors to capture the premium potential of municipal high yield while maintaining the benefits of a transparent, liquid, and passively managed ETF structure.

Short HY Munis: Positioning Early in a Market Poised for Spread Compression

Short HY municipal bonds present a particularly attractive investment opportunity in the current market environment. On a tax-equivalent basis, they offer close to 290 basis points of incremental yield compared with short investment-grade munis, and they do so without meaningfully extending duration. This makes them an efficient way to capture enhanced income while maintaining a conservative stance on interest-rate risk.

Higher Yield without Extended Duration

Source: ICE Data Services. As of 8/31/25.See important disclosures for definitions and additional information.

Source: ICE Data Services. As of 8/31/25. See important disclosures for definitions and additional information.

Currently, short-dated HY paper on average still offers wider spreads relative to the long end of the curve. This dynamic exists because many high-yield muni investors traditionally prefer locking in rates through longer-term maturities, aligning with the 20+ year issuance profile of much of the sector. As a result, shorter-dated HY bonds have historically been under-owned and undervalued, leaving spread levels more elevated compared with their long-dated securities.

However, we are beginning to observe growing demand for shorter-dated HY paper in the secondary market. This development is important for investors, as increased buying interest could gradually lead to spread compression in the short HY segment. While this may reduce the current yield premium, it also highlights the advantage of positioning early to capture value before spreads tighten further. For now, short HY munis continue to offer a compelling balance of yield pickup, manageable duration, and defensive positioning, making them a valuable component for investors seeking income while carefully navigating rate risk.

Opportunity in the Steep Muni 2s10s Curve: Positioning Ahead of Curve Convergence

Treasury VS. Muni 2s10 Spread

Source: ICE Data Services and Bloomberg. As of 8/31/25. See important disclosures for additional information.

As of the end of August, the Muni AAA 2s10s spread had widened by nearly 70 basis points year-to-date, compared with only about 25 basis points of steepening in the Treasury 2s10s curve over the same period. The municipal 2s10s curve currently stands out as the steepest among major fixed income markets, diverging meaningfully from both U.S. Treasuries and high-grade corporates. Historically, the muni 2s10s spread has tended to track more closely with, or even remain tighter than, the Treasury curve. This unusual steepness highlights a relative value dislocation between munis and other high-quality fixed income markets.

SHYD provides targeted exposure to the 1-12 year segment of the municipal curve, an area where we see a compelling opportunity. With the muni curve unusually steep relative to other fixed income markets, investors will benefit from both attractive levels of tax-exempt income and the potential for improving relative value in the short-to-intermediate market.

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