(Bloomberg) -- It’s been a banner year for high-yield municipal bonds, and in particular the category’s star money manager, John Miller, who joined First Eagle Investments in January after nearly three decades at Nuveen.
Investors have plowed almost $4.4 billion into his First Eagle High Yield Municipal Fund this year through November, or almost a third of the cash that they added to riskier muni-bond funds, according to Morningstar Direct data. The open-end fund’s 11.4% return for 2024 is also better than all of its peers, data compiled by Bloomberg show, and superior to the 5.9% gain for the Bloomberg Muni High-Yield Index.
“The fund is certainly announcing its arrival in the high-yield space with a splash,” said Eric Kazatsky, senior US municipals strategist at Bloomberg Intelligence. “Its returns this year really speak volumes about the ability to replicate a model that was so successful for so long somewhere completely different.”
Miller, 57, left his former employer in 2023, after building up what is still the largest junk muni fund, Nuveen’s $15.8 billion high-yield muni fund. He departed Nuveen after the asset manager settled a years-long legal battle with Preston Hollow Community Capital, a lender that accused Miller of trying to use his dominant position in the high-yield muni market to hurts its smaller rival.
The Nuveen fund, meanwhile, had about $731 million in outflows this year through November, according to Morningstar, and its 4.2% return has left it trailing most peers and the muni high-yield index. A spokesperson for Nuveen pointed out that the firm oversees almost $200 billion across all its muni offerings and received $6 billion of net flows across various products this year through November. The spokesperson also referenced that Nuveen’s Enhanced High-Yield Municipal Bond Fund — a closed-end product — has returned 11.4% since the start of the year.
Miller started his new job during an extended period of strength in riskier munis. They’re beating investment-grade state and local-government debt for the second year in a row, buoyed by demand for extra yield and solid economic growth that has helped keep down defaults.
He attributed the new fund’s outperformance to a decision to underweight tobacco bonds, securities backed by payments under a 1998 national tobacco settlement with US states, and debt issued by Puerto Rico. These two large segments of the high-yield muni market have trailed the index this year. Tobacco bonds are flat and debt issued by Puerto Rico, the US commonwealth that exited bankruptcy in 2022, has returned 3.2%.
“Those two sectors really rallied in November and December of last year before we were operational,” Miller said in a video interview last week. “We didn’t look at what’s already run up a lot.”
Underlying Weakness
Both tobacco bonds and Puerto Rico obligations have underlying credit weaknesses too, Miller said.
Cigarette consumption has declined as former smokers turn to vaping or nicotine pouches. Shipments by Marlboro maker Philip Morris International are down about a third from 2012, according to the company. Puerto Rico, meanwhile, has been hit by severe hurricanes, which can cripple its fragile electric grid and hamstring its economy.
“I would say the credit concerns are being somewhat ignored by the marketplace,” Miller said.
Instead, Miller’s fund bought securities for real estate developments in Atlanta and Miami and beaten-down sectors like senior living.
More than 6% of the fund’s portfolio is invested in bonds issued for Brightline Florida, a private passenger railroad from Miami to Orlando. And 2.3% is invested in debt issued for Brightline West, a railroad planned between Southern California and Las Vegas. Brightline Florida’s 12% unrated tax-exempt bonds, Miller’s single-biggest position, has returned almost 16% since May, according to data compiled by Bloomberg.
At Barclays Plc, Mikhail Foux’s view is that investors should temper expectations for another strong year of returns for high-yield munis, with credit spreads near decade lows.
“There’s clearly not a lot of juice,” said the firm’s head muni strategist. “We don’t think that rates will actually rally from here, so if anything there could potentially be a downside.”
Foux projects that high-yield munis will return 4.5% to 5% in 2025, roughly their coupon income, while investment-grade munis will earn 3% to 3.5%.
However, as Miller sees it, there’s room for spreads on high-yield munis to narrow further, given the strength of the US economy and the Federal Reserve’s projections that it will lower borrowing costs further next year.
“The Fed is preemptively cutting rates so that they can try to execute the soft landing — that would be good for high-yield outperformance,” Miller said.
