Understanding the Hidden Risks in High-Yield Municipal Bonds
June 26, 2025 By Sage Advisory
Fixed income investors are often caught in a balancing act: the pursuit of higher yields versus the need to manage risk. In today’s environment, where investment grade municipal bonds offer modest returns, many investors are drawn to high-yield municipal bonds for their significantly higher income potential. Historically, this strategy has paid off — especially when investments are made through diversified, commingled funds that offer liquidity buffers.
However, this approach can mask a critical vulnerability: the underlying illiquidity of many high-yield municipal securities. These bonds, often tied to niche or speculative projects, can be difficult to price and even harder to sell in stressed markets.
A recent and dramatic example underscores this risk. The Easterly ROCMuni High Income Municipal Bond Fund experienced a nearly 50% drop in net asset value (NAV) in just one day — falling from $6.15 on June 12 to $3.16 on June 13.
Source: Bloomberg
This sharp decline was triggered by the fund’s forced liquidation of illiquid holdings, including debt from biofuel ventures, recycling plants, and retirement facilities — sectors known for their limited trading activity and opaque pricing.
Source: Bloomberg
Because municipal bonds are typically priced using models rather than actual market transactions, the gap between theoretical value and real-world sale prices can be vast — especially during periods of forced selling. This event highlights the potential for significant losses, even in a market segment that has delivered strong returns over the past decade.
At Sage, we’ve long emphasized the importance of liquidity and credit quality. Our commitment to investment-grade municipal bonds ensures that our clients benefit from transparency, stability, and real market pricing. While high-yield bonds can play a role in a diversified portfolio, investors must remain vigilant about the hidden risks — particularly those tied to liquidity and price discovery.
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