High-yield munis pay noticeably more than their investment-grade cousins, and the interest is typically exempt from federal taxes. For investors in high brackets, the after-tax yield can rival much riskier corporate debt.
The extra yield exists for a reason. These issuers, from hospitals to toll roads to smaller cities, carry lower credit ratings and more sensitivity to local economic conditions. Defaults are historically rare but cluster in specific sectors and recessions.
Diversification is the main defense. A fund holding hundreds of credits spreads the risk far thinner than a handful of individual bonds, and professional management handles the credit research most individual investors would rather not do.
Key takeaways
- Muni interest is usually exempt from federal tax
- High yield means higher credit risk, not free money
- Funds diversify away single-issuer default risk
