Municipal mutual funds are
High absolute yields on investment-grade debt, geopolitical uncertainty and concerns about inflation and private credit may be weighing on high-yield investors, market participants said. But demand continues to outstrip high-yield supply on the primary market, where the story is a divided one, with many deals wildly oversubscribed and others sent back to the drawing board, buysiders said.
"While still receiving inflows, high yield has recently been left out of the really robust flows that high-quality bonds are experiencing," said John Miller, CIO and head of the municipal credit team at First Eagle Investments. "It's more sentiment than anything truly data- or default-driven."
For the week ended Thursday, investors added $1.4 billion into muni bond mutual funds and exchange-traded funds in the week ended Wednesday, according to LSEG Lipper data.
Investment grade made up $990 million of that and high-yield funds $425.6 million.
Year-to-date inflows now stand at $45.5 billion, the second-highest level on record for the comparable period, trailing only 2021 at $48.6 billion, according to J.P. Morgan strategists.
Of the year-to-date inflows, investment-grade bonds accounts for $39 billion and high-yield bonds for $6.5 billion, per Lipper.
In 2025, high-yield mutual funds captured 27% of the total muni bond mutual fund flows, according to Pat Luby, head of municipal strategies at CreditSights. This year, that number is a bit slower, at 23%, Luby said.
On the ETF side, high-yield accounted for 8% of the flows into muni ETFs through May, he said. This year it's 6%.
"In both cases, it's down a little bit, suggesting investors and their advisors are being a bit more selective," Luby said. "Probably headlines like
Absolute yields are at or near their highs in over a decade, allowing investors to lock in high single digit or even low double digit tax equivalent yields on investment-grade paper without taking on the additional credit risk in the high-yield market, said Justin Horowitz, senior portfolio manager at Birch Creek Capital.
A high-yield portfolio manager needs to be more cautious than an investment-grade one, Luby said, because when credit quality on a high-yield credit declines "liquidity can evaporate."
"So they're forced by their job descriptions to be thinking years into the future and their underwriting standards are usually based on hard-fought experience," he said. "For those investors who are seeking income, a higher-rated A credit or higher cash-flowing ETF or mutual fund in the current rate environment can be satisfactory with a greater comfort level on the credit rating."
On the primary side, deals are flowing but the reception is uneven, investors said.
"There are plenty of deals out there, but they don't all get done," Miller said. "When something does make sense from a pricing and credit side, they can be well oversubscribed," he said. "There's cash out there for the right credits at the right price."
The charter school sector has a strong pipeline but some of the credits are just not ready to come to market, Miller said. Some dirt deals have come to market with too much leverage and not enough development, and those have been sent back to the drawing board, he said.
Birch Creek Capital, in a May 31 note, reported several deals that had priced the week prior were oversubscribed and traded up in the secondary. An $89 million BB-plus rated Florida senior living deal was "heavily oversubscribed" and bumped 14bps in primary pricing the firm said. A nonrated Colorado-based development district that priced in mid-May at 6.5% tightened to 6.1% a week later. A nonrated multifamily housing deal that priced at 6.17% the previous week traded up to 5.75% the following week, the firm said.
"The lack of new issuance has created a significant supply/demand imbalance," Horowitz said. "The most speculative deals may still require a bit more tweaking as buyers have become more discerning, but for the most part, standard, run-of-the-mill high-yield transactions are seeing incredible demand, with many deals hitting 20-times-plus subscription levels."
The year's "incredible" geopolitical volatility, rising inflation and recession fears have typically led to wider credit spreads and investors exercising more caution when allocating capital, Horowitz added.
Another distressed debt buyer warned inflows may not last.
"There's uncertainty everywhere," said the investor, who has declined to participate in several deals this year that appeared to lack sufficient bondholder protections. "There are all these inflationary pressures and huge flows are coming in," the buyer said. "Munis are just kind of ignoring the realities of the world and I think that's going to change."
Jessica Lerner contributed to this story.
