If I asked you which fixed-income sector would show stronger returns over the last 8 years: short-duration HY munis or HY corporate debt, what would you say?
I can tell you what I would say – I would expect HY corps to crush munis.
And boy how wrong would I be!
To be fair this is not the best of comparisons as NVHAX is actively managed (though it takes a big fee for that benefit) and has used mild leverage.
That said, this is quite an impressive track record. Part of it likely has to do with the much lower default rate of HY munis. What it doesn’t have to do with is credit spreads – HY munis tend to trade at tighter credit spreads than HY corporate bonds so this is not a question of pure carry. it is also possible that short-duration HY munis does not mean short-duration. NHVAX shows an effective duration of 3.8 which is not that far off the high-yield index.
Overall, this is quite a strong vote for having short-duration HY munis in the portfolio, particularly at current levels of risk-free rates.