One can make a solid investment case for high yield municipals from an index performance standpoint. Capturing that performance in the real world may not be quite so simple. One of the “dirty little secrets” of the municipal market is how dependent market participants are to bond evaluations provided by third-party pricing services such as J.J. Kenny (a subsidiary of Standard & Poor’s); Interactive Data; and, more recently, Thomson Reuters and Bloomberg. Because of its relatively infrequent trading flows and sensitivity to even the slightest change in creditworthiness, the high yield sector is particularly vulnerable to potential mispricing.
This phenomenon is not all that surprising when one considers the following characteristics of the municipal sector: