Why High Yield Munis Default Less Than Corporate High Yield
May 21, 2026
Read Time 4 MIN
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
| Period | HY Muni Default Rate | Corporate HY Default Rate | Key Driver |
| 2008 Financial Crisis | Low | Elevated | Corporate leverage and credit contraction |
| COVID-19 (2020) | Minimal | Spiked | Business disruption vs. essential services |
| Rising Rate Environment | Stable | Increasing | Rate sensitivity and refinancing risk |
| Long-term Historical Avg. | ~0.1% (IG munis) | ~2–4% (corporates) | Structural differences in issuer type |
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.
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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.
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Important Disclosures
This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities, financial instruments or digital assets mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, tax advice, or any call to action. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results, are for illustrative purposes only, are valid as of the date of this communication, and are subject to change without notice. Actual future performance of any assets or industries mentioned are unknown. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third party data. The information herein represents the opinion of the author(s), but not necessarily those of VanEck or its other employees.
The yields and market values of municipal securities may be more affected by changes in tax rates and policies than similar income-bearing taxable securities. Certain investors incomes may be subject to the Federal Alternative Minimum Tax (AMT) and taxable gains are also possible.
ICE Broad High Yield Crossover Municipal Index (MHYX) is intended to track the overall performance of the U.S. dollar denominated high yield long-term tax-exempt bond market.
An investment in the VanEck High Yield Muni ETF (HYD) may be subject to risks which include, among others, municipal securities, high yield securities, credit, interest rate, call, private activity bonds, industrial development bond, health care bond, California, New York, market, operational, sampling, index tracking, tax, authorized participant concentration, no guarantee of active trading market, trading issues, passive management, fund shares trading, premium/discount and liquidity of fund shares, and index-related concentration risks, all of which may adversely affect the Fund. High-yield municipal bonds are subject to greater risk of loss of income and principal than higher-rated securities, and are likely to be more sensitive to adverse economic changes or individual municipal developments than those of higher-rated securities. Municipal bonds may be less liquid than taxable bonds. A portion of the dividends you receive may be subject to the federal alternative minimum tax (AMT). There is no guarantee that the Fund's income will be exempt from federal, state or local income taxes, and changes in those tax rates or in alternative minimum tax rates or in the tax treatment of municipal bonds may make them less attractive as investments and cause them to lose value. Capital gains, if any, are subject to capital gains tax.
An investment in the VanEck Short High Yield Muni ETF (SHYD) may be subject to risks which include, among others, municipal securities, credit, interest rate, high yield securities, industrial development bond, Illinois, New York, call, private activity bonds, market, operational, sampling, index tracking, tax, authorized participant concentration, no guarantee of active trading market, trading issues, passive management, fund shares trading, premium/discount and liquidity of fund shares, and index-related concentration risks, all of which may adversely affect the Fund. High-yield municipal bonds are subject to greater risk of loss of income and principal than higher-rated securities, and are likely to be more sensitive to adverse economic changes or individual municipal developments than those of higher-rated securities. Municipal bonds may be less liquid than taxable bonds. A portion of the dividends you receive may be subject to the federal alternative minimum tax (AMT).There is no guarantee that the Fund's income will be exempt from federal, state or local income taxes, and changes in those tax rates or in alternative minimum tax rates or in the tax treatment of municipal bonds may make them less attractive as investments and cause them to lose value. Capital gains, if any, are subject to capital gains tax. The Fund's assets may be concentrated in a particular sector and may be subject to more risk than investments in a diverse group of sectors.
Investing involves substantial risk and high volatility, including possible loss of principal. Bonds and bond funds will decrease in value as interest rates rise. An investor should consider the investment objective, risks, charges and expenses of the Fund carefully before investing. To obtain a prospectus and summary prospectus, which contains this and other information, call 800.826.2333 or visit vaneck.com/etfs. Please read the prospectus and summary prospectus carefully before investing.
© Van Eck Securities Corporation, Distributor, a wholly owned subsidiary of Van Eck Associates Corporation.
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Important Disclosures
This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities, financial instruments or digital assets mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, tax advice, or any call to action. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results, are for illustrative purposes only, are valid as of the date of this communication, and are subject to change without notice. Actual future performance of any assets or industries mentioned are unknown. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third party data. The information herein represents the opinion of the author(s), but not necessarily those of VanEck or its other employees.
The yields and market values of municipal securities may be more affected by changes in tax rates and policies than similar income-bearing taxable securities. Certain investors incomes may be subject to the Federal Alternative Minimum Tax (AMT) and taxable gains are also possible.
ICE Broad High Yield Crossover Municipal Index (MHYX) is intended to track the overall performance of the U.S. dollar denominated high yield long-term tax-exempt bond market.
An investment in the VanEck High Yield Muni ETF (HYD) may be subject to risks which include, among others, municipal securities, high yield securities, credit, interest rate, call, private activity bonds, industrial development bond, health care bond, California, New York, market, operational, sampling, index tracking, tax, authorized participant concentration, no guarantee of active trading market, trading issues, passive management, fund shares trading, premium/discount and liquidity of fund shares, and index-related concentration risks, all of which may adversely affect the Fund. High-yield municipal bonds are subject to greater risk of loss of income and principal than higher-rated securities, and are likely to be more sensitive to adverse economic changes or individual municipal developments than those of higher-rated securities. Municipal bonds may be less liquid than taxable bonds. A portion of the dividends you receive may be subject to the federal alternative minimum tax (AMT). There is no guarantee that the Fund's income will be exempt from federal, state or local income taxes, and changes in those tax rates or in alternative minimum tax rates or in the tax treatment of municipal bonds may make them less attractive as investments and cause them to lose value. Capital gains, if any, are subject to capital gains tax.
An investment in the VanEck Short High Yield Muni ETF (SHYD) may be subject to risks which include, among others, municipal securities, credit, interest rate, high yield securities, industrial development bond, Illinois, New York, call, private activity bonds, market, operational, sampling, index tracking, tax, authorized participant concentration, no guarantee of active trading market, trading issues, passive management, fund shares trading, premium/discount and liquidity of fund shares, and index-related concentration risks, all of which may adversely affect the Fund. High-yield municipal bonds are subject to greater risk of loss of income and principal than higher-rated securities, and are likely to be more sensitive to adverse economic changes or individual municipal developments than those of higher-rated securities. Municipal bonds may be less liquid than taxable bonds. A portion of the dividends you receive may be subject to the federal alternative minimum tax (AMT).There is no guarantee that the Fund's income will be exempt from federal, state or local income taxes, and changes in those tax rates or in alternative minimum tax rates or in the tax treatment of municipal bonds may make them less attractive as investments and cause them to lose value. Capital gains, if any, are subject to capital gains tax. The Fund's assets may be concentrated in a particular sector and may be subject to more risk than investments in a diverse group of sectors.
Investing involves substantial risk and high volatility, including possible loss of principal. Bonds and bond funds will decrease in value as interest rates rise. An investor should consider the investment objective, risks, charges and expenses of the Fund carefully before investing. To obtain a prospectus and summary prospectus, which contains this and other information, call 800.826.2333 or visit vaneck.com/etfs. Please read the prospectus and summary prospectus carefully before investing.
© Van Eck Securities Corporation, Distributor, a wholly owned subsidiary of Van Eck Associates Corporation.