Harnessing the high yield municipal bond advantage

High yield municipal bonds represent an often-overlooked part of the fixed income market that can provide investors with a unique combination of tax-advantaged income and long-term return potential. Their benefits are particularly compelling in today’s market due to:

• Attractive yields on an absolute basis 
• Strong credit fundamentals
• A favorable environment where demand is outpacing supply

Attractive absolute and relative yield

High yield municipal bonds offer compelling taxable-equivalent yields, especially in today’s market environment. With a taxable-equivalent yield of 9.17%, high yield municipal bonds are attractive when compared with both investment grade municipal bonds and taxable fixed income bonds. For investors in higher tax brackets, the taxable-equivalent yield for high yield municipal bonds can be particularly compelling. This yield advantage can provide an income cushion with the potential to help mitigate price volatility if interest rates move.

Fixed income yields (as of February 28, 2025)

The current market environment presents an attractive entry point into municipal bonds as absolute yields are attractive especially when considering the taxable-equivalent yields and sound credit fundamentals.

Municipal bonds: Yield to worst (March 2015-February 2025)

Strong credit fundamentals

High yield municipal bonds have had significantly fewer defaults than high yield corporate bonds over time and historically have higher recovery rates when they do default. According to Moody’s, the default rate for high yield corporates (29.71%) was more than four times that of high yield municipal bonds (6.83%) between 1970 and 2023. The nature of municipal bonds inherently lends itself to stronger fundamentals when compared with municipals’ corporate counterparts. This is primarily due to: 

• The essential nature of many municipal services 
• The taxing authority of government issuers
• Debt structures generally being more conservative 
• The asset-backed nature of many projects

Below-investment-grade bonds: 10-year average cumulative issuer-weighted default rates

State and local governments demonstrated resilience during and after the COVID-19 pandemic, supported by federal stimulus funds, strong tax collections, and robust rainy day funds (surplus revenue set aside for use during an unexpected deficit). Personal income and property taxes are key drivers of state and local revenues and, as revenues performed better than expected during this period, many municipalities were able to be conservative with their use of the pandemic stimulus, establishing the foundation for longer-term positive credit trajectories.

Favorable market dynamics

Demand for high yield municipal bonds far exceeds the supply, and we expect this trend to continue. The high yield segment of the municipal market accounts for about 10% of the over $4 trillion municipal bond market. However, high yield municipal bond funds are capturing an outsized share of fund flows, accounting for 38% of flows into the asset class in 2024. This trend has continued into the early months of 2025. 

High yield municipal bond issuance has underwhelmed for several years and despite an increase in 2024, it remains a fraction of the broader market. At their highest point in recent years, high yield municipal bonds accounted for only 12% of new issuance. Large non-rated deals are generally oversubscribed when they come to market. This robust demand for a limited supply of bonds creates a strong technical backdrop.

High yield municipal bond issuance in $US billions (2010-2024, by year)

Long-term advantages of allocating to high yield bonds

On a tax-adjusted basis, high yield municipal bonds have been the best performer in the fixed income market over the past five years, offering a compelling combination of attractive tax-advantaged yields and competitive risk-adjusted return potential. 

Fixed income annualized returns for the past five years (as of December 31, 2024)

Investors have been compensated for going lower in credit quality as high yield municipal bonds have consistently outperformed over time.

Municipal bond returns by credit rating (as of December 31, 2024)

Putting insights into action

The $4 trillion municipal bond market is distributed across more than one million distinct bonds and 50,000 issuers. The large, fragmented structure can create pricing inefficiencies that active managers can exploit through deep credit research. We believe today’s environment creates a unique opportunity to invest at attractive yields and with sound credit fundamentals. 

Led by three experienced bond managers and supported by 10 dedicated analysts and traders, our Municipal Bond Team manages $11.8 billion in assets across strategies. Our award-winning¹ team has a 40+ year track record of helping income-seeking investors. Investors can now access our flagship high yield municipal bond expertise in Macquarie National High-Yield Municipal Bond ETF (HTAX).

1. Barron’s Best Fund Families ranked Macquarie Asset Management #1 in the tax-exempt bond category for 2023 and 2020. The ranking looks at one-year relative performance of fund firms that offer a diversified lineup of actively managed mutual funds and ETFs. The ranking eliminates index funds. Results are based on firms’ skill in active management. Ranking calculates returns before any 12b-1 fees are deducted. Similarly, fund loads, or sales charges are not included in the return calculations. 49 asset managers were included in Barron’s one-year ranking list for the year ending December 31, 2023. 53 asset managers were included in Barron’s one-year ranking list for the year ending December 31, 2020. In 2020, the Macquarie Municipal Bond Team was listed under Delaware Management. This ranking is not based on total return. The ranking is the opinion of Barron's and not Macquarie Group. No such person creating the ranking is affiliated with Macquarie Group. There can be no assurances that other providers or surveys would reach the same conclusions as this ranking.

Carefully consider the Fund's investment objectives, risk factors, and charges and expenses before investing. This and other information can be found in the Fund's prospectus or the summary prospectus, which may be obtained by visiting macquarie.com/mam/etf-literature or calling 844 469-9911. Read the prospectus carefully before investing.

The Macquarie ETF Trust Funds are distributed by Foreside Financial Services, LLC. Foreside Financial Services, LLC is not affiliated with any Macquarie entity, including Macquarie Asset Management and Delaware Distributors, L.P.

Macquarie ETF Trust exchange-traded funds (ETFs) are actively managed and do not seek to replicate a specific index. ETF shares are bought and sold through an exchange at the then current market price, not net asset value (NAV), and are not individually redeemed from the fund. Shares may trade at a premium or discount to their NAV when traded on an exchange. Brokerage commissions will reduce returns. There can be no guarantee that an active market for ETFs will develop or be maintained, or that the ETF's listing will continue or remain unchanged.

Investing in any exchange-traded fund involves the risk that you may lose part or all of the money you invest. Over time, the value of your investment in the Fund will increase and decrease according to changes in the value of the securities in the Fund’s portfolio. An investment in the Fund may not be appropriate for all investors.

The Fund’s principal risks include but are not limited to the following:

Fixed income securities can lose value, including the possible loss of principal. Fixed income securities are subject to credit risk and interest rate risk. Credit risk is the risk that an issuer of a fixed income security may be unable to make interest payments and/or repay principal in a timely manner. Interest rate risk is the risk that prices of bonds and other fixed income securities will increase as interest rates fall and decrease as interest rates rise. Fixed income securities with longer maturities or duration generally are more sensitive to interest rate changes.

High yield securities (“junk bonds”) are subject to reduced creditworthiness of issuers, increased risk of default, and a more limited and less liquid secondary market. High yield securities may also be subject to greater price volatility and risk of loss of income and principal than higher-rated securities.

Governments or regulatory authorities may take actions that could adversely affect various sectors of the securities markets and affect fund performance.

Substantially all dividend income derived from tax-free funds is exempt from federal income tax. Some income may be subject to state or local and/or the federal alternative minimum tax (AMT) that applies to certain investors. Capital gains, if any, are taxable.

The ETF is a newly organized, diversified management investment company with limited operating history. In addition, there can be no assurance that the Fund will grow to, or maintain, an economically viable size, in which case the Board of Trustees of the Trust (the “Board") may determine to liquidate the Fund.

The Bloomberg Municipal Bond Index measures the total return performance of the long-term, investment grade tax-exempt bond market.

The Bloomberg US Treasury Index measures the performance of US Treasury bonds and notes that have at least one year to maturity.

The Bloomberg US Agency Index is composed of publicly issued debt of US government agencies, quasi-federal corporations, and corporate or foreign debt guaranteed by the US government. The largest issuers are Fannie Mae, Freddie Mac, and the Federal Home Loan Bank System (FHLB). 

The Bloomberg US Corporate Bond Index is composed of US dollar-denominated, investment grade corporate bonds that are US Securities and Exchange Commission (SEC)-registered or 144A with registration rights, and issued by industrial, utility, and financial companies. All bonds in the index have at least one year to maturity.

The Bloomberg US Corporate High-Yield Index is composed of US dollar–denominated, noninvestment grade corporate bonds for which the middle rating among Moody’s Investors Service, Inc., Fitch, Inc., and Standard & Poor’s is Ba1/BB+/BB+ or below.

The Bloomberg US Credit Index measures the total return performance of nonconvertible, investment-grade domestic corporate bonds and SEC-registered foreign issues. All bonds in the index have at least one year to maturity.

The Bloomberg US Fixed-Rate Asset-Backed Securities (ABS) Index tracks the fixed-rate ABS market for bonds with collateral types of credit cards, autos, and stranded-cost utility (rate reduction bonds). To be included in the index, an issue must have a fixed-rate coupon structure, have an average maturity of greater than or equal to one year, and be part of a public deal.

The Bloomberg US Mortgage-Backed Securities (MBS) Index measures the performance of agency mortgage-backed pass-through securities (both fixed-rate and hybrid adjustable-rate mortgage) issued by the Federal National Mortgage Association (Fannie Mae), Federal Home Loan Mortgage Association (Freddie Mac), and Government National Mortgage Association (Ginnie Mae).

The Bloomberg US Commercial Mortgage-Backed Securities (CMBS) ERISA-Eligible Index measures the market of commercial mortgage-backed securities transactions with a minimum current size of $300 million, and includes investment grade securities that are Employee Retirement Income Security Act (ERISA)-eligible under the underwriter’s exemption.

The Bloomberg Emerging Markets USD Aggregate Index is a hard currency emerging markets debt benchmark that includes US dollar-denominated debt from sovereign, quasi-sovereign, and corporate emerging market issuers.

The Bloomberg High-Yield Municipal Bond Index measures the total return performance of the long-term, non-investment-grade tax-exempt bond market.

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