Commentaries

High Yield Municipal Fund Commentary

High Yield Municipal Fund Commentary

Market Overview

As of December 31, 2025

During the fourth quarter, the municipal bond market continued to rebound from the challenges of the first half of 2025.

Record-setting bond issuance continued to be met by strong demand, enabling muni indexes to post positive returns for the quarter and the year. The S&P Municipal Bond High Yield Index gained 1.5% during the fourth quarter, while the S&P Municipal Yield Index, which includes bonds across the quality spectrum, rose 1.7% and the S&P Short Duration Municipal Yield Index advanced 0.6%. Those indexes were up a respective 3.3%, 3.5% and 4.3% in full-year 2025. For context, the Bloomberg US Aggregate Bond Index gained 1.1% during the quarter and 7.3% in the year.1

Market Able to Absorb Record Levels of Muni Issuance

Though the pace of muni bond issuance eased somewhat in the fourth quarter, the $100 billion-plus of new issuance during the period was enough to drive the market to a new annual high of $580 billion, about 13% above the previous record set in 2024. It’s worth noting that the vast majority of issuance during the year was new capital, with refunding activity accounting for only about 12%.2 Lower levels of refunding transactions suggest fewer bonds are being called, which can help support valuations for the market as a whole.

We were not surprised to see the municipal bond curve steepen considerably during 2025. The flood of issuance—high yield muni issuance in particular, given its long-dated nature, generally provides a steepening impulse to the yield curve—pushed long yields higher, although Federal Reserve policy rate cuts weighed on the short end of the muni curve.3 The US Treasury curve also steepened over the year as term premia returned to the Treasury market after being mostly negative for nearly a decade.4

There are a few factors we believe have contributed to the ongoing surge in issuance. After sitting on the sidelines during the 2022–23 rate-hike period, municipalities have a pent-up need to issue paper as the benefits of Covid-era federal funding and post-pandemic tax receipts wane. Meanwhile, pretty much every capital project costs more today from the impact of inflation across inputs like steel, concrete and lumber, and increased costs for civil engineering, skilled and unskilled labor, etc. Further, potential legislative threats to muni bond tax treatment in the first half of the year—since alleviated—likely pulled forward some issuance.

Fortunately, the US government shutdown that began on October 1 did not have the same chilling effect on demand as the Liberation Day tariff announcements in April, and massive issuance was met by robust demand throughout the fourth quarter. Flows into municipal bond mutual funds and exchange traded funds ended the year strong, amounting to about $23 billion in the fourth quarter, which represented more than one-third of full-year 2025 flows.5

The Fed’s dovish tilt in the second half of the year has also supported demand for muni bonds. Though it was cut off from official federal agency data during the government shutdown, the Fed followed up its September rate cut with another in October. The catch-up in economic data flow, after federal employees returned to work in mid-November, did little to change the central bank’s viewpoint, which seemed to center more on a weakening labor market than inflation concerns, and an additional December cut brought the federal funds rate down to 3.50–3.75% to end the year.6

The Fed appears well-positioned to wait and see how the economy evolves, and the dot plot of rate projections published in December points to only one additional 25 basis point cut in 2026.7 That said, the Trump administration’s very public desire for lower rates and conflict with Fed Chair Powell—highlighted by early-January reports that the Department of Justice had opened a criminal investigation into Powell related to the renovation of the Fed’s headquarters—suggest that whoever replaces Powell when his term as Fed chair ends in May 2026 is likely to be more dovish than the average governor. In a world of increasingly lower floating-rate yields, investors may increasingly view fixed-rate municipal bonds as a more appealing cash equivalent.

Fundamentals Remain Steady

The initial estimate of third quarter GDP for the US came in at 4.3%, up from 3.8% in the second quarter and well above the consensus estimate of 3.3%. While growth in the fourth quarter is likely to be negatively impacted by the government shutdown, fiscal stimulus from High Yield Municipal Fund First Eagle High Yield Municipal Fund page 2 First Eagle Investments the 2025 tax bill and potential monetary stimulus should be supportive of economic activity in 2026, to the ongoing benefit of municipal issuer fundamentals.8

Municipalities entered 2025 in strong fiscal condition, and issuer fundamentals continue to be supportive. State budgets for fiscal 2026 overall reflect a healthy environment, and general fund balances remain well above the historical average even as they continue to ease from 2023’s peak. Though state general fund revenue has fallen off the record pace of fiscal 2021 and 2022 as the impact of Covid–era relief waned, it has continued to grow, and modest revenue gains are expected in fiscal 2026. Budgets enacted to date suggest flat general fund spending in 2026, and most states plan to maintain or increase the size of their rainy-day fund—many of which are already at nominal highs—in anticipation of future needs.9

Another sign of fiscal strength can be found in improved pension funding, as the aggregate median ratio for local-government pensions climbed to 80% in fiscal 2024 from 78% in fiscal 2022. While this can be attributed in part to market performance, local governments have increased contributions and tweaked their benefit structures, demonstrating improved funding discipline and better long-term sustainability.10

Overall, muni bond ratings activity has been positive in 2025, but not by much: Positive activity (including both upgrades and favorable outlook revisions) outpaced negative activity at a rate of 1.4x year to date through November.11 Both defaults and first-time distressed debt remained very low in 2025.12

Start of a Turnaround?

Muni bond performance in 2025 was a tale of two halves, and we’re encouraged by the asset class’s momentum in the second half. It seems likely to us that the factors driving recent performance and fund flows—credit stability, certainty around tax treatment, an accommodative Fed and relatively benign tariff impacts—will continue to support the asset class, even in what is expected to be another year of robust issuance.

As a team, we remain focused on seeking to provide a high level of tax-free current income through bottom-up security selection complemented by an active trading strategy and the prudent application of leverage. This approach, combined with consistent fund inflows, has enabled us to increase the interest income generated by the portfolio in 2025, and we have passed this along to shareholders in the form of a higher monthly distribution rate.13

Portfolio Review

High Yield Municipal Fund A Shares (without sales charge*) posted a return of –0.25% in fourth quarter 2025. The Fund underperformed the S&P Municipal Yield Index in the period.

While municipal bonds issued by Puerto Rico account for more than 8% of the benchmark index, we take a highly selective approach to buying paper issued by the territory. Investing in US territories entails unique legal and political risks not typical of the broader municipal bond market and must be approached with additional diligence. Revenue bonds backed by toll roads were among the few Puerto Rico issues that have met our investment criteria, and they were a strong contributor to fourth-quarter performance. The roads in question connect several of the island’s key economic hubs. Issued with a BBB rating in 2024, these bonds were upgraded to BBB+ in December by Fitch, citing positive traffic and revenue trends supportive of stronger financial metrics, and price appreciation resulted.

In contrast with our holdings for Puerto Rico, healthcare represents a significant exposure for the Fund. Senior care and senior living are areas within healthcare where we think fundamental analysis may help identify attractive bonds that stand to benefit from the “silver tsunami” of Americans who will retire by 2030. While this sector has recovered from Covid-19 disruptions, it still accounted for a meaningful portion of the first-time muni defaults in 2025, which is why we prioritize the bonds of well-managed senior living facilities that are located in growing states and are less dependent on government-subsidized residents. Among the largest contributors to fourth-quarter performance were bonds issued by Sanctuary LTC, which owns a portfolio of more than 20 nonprofit lifecare facilities in attractive markets in Texas, Oklahoma and Colorado.

Bonds related to the Brightline passenger rail project in Florida comprised the biggest detractors to performance in the fourth quarter. Brightline, which is backed by private equity firm Fortress Investment Group, is the only privately owned and operated intercity railroad in the US. It began service in Florida in 2018 and has steadily increased its footprint along the east coast of the state from Miami to Orlando and has plans to expand its network from Orlando to Tampa.

These bonds came under fire in 2025 and were subject to downgrades from rating agencies citing lower-than-expected ridership and higher costs as well as dwindling cash reserves and other liquidity concerns. In July, Brightline announced that it would defer its mid-month interest payment on certain tranches of debt, news to which markets reacted very negatively, which we believe was an overreaction. Outstanding Brightline bonds continue to trade at deep discounts.

Despite Brightline’s recent difficulties, we remain constructive on both the project and the bonds. The negative market sentiment largely has been priced into the bonds, in our view, substantially reducing our downside risk in 2026 while enhancing our upside potential. Meanwhile, recent trends at the company have been bullish.

Operational improvements in 2025—including the addition of 30 new train cars and a complete schedule revamp to improve network optimization—have put Brightline on the verge of finally generating positive monthly cash flow. This operational momentum will have a direct impact on the ability of Fortress Investments (Brightline’s owner) to attract equity investors and raise substantial additional funds to improve Brightline’s capital structure and pay down higher coupon debt as well as deferred interest. We have been told that potential equity investors are spending significant time and money on due diligence efforts.

In January 2026, Brightline announced the appointment of Nicolas Petrovic as CEO of Brightline Holdings LLC. Petrovic has more than 25 years of rail experience, with leadership positions across Europe and the Middle East, including with Eurostar, Siemens France and, most recently, Etihad Rail Mobility. In our view, Brightline’s ability to lure such a tenured and respected CEO to Florida at this stage of his career speaks volumes about the company’s prospects going forward.

In short, we believe outstanding Brightline bonds have been oversold and that the combination of operational momentum, new leadership and a likely equity infusion suggests substantial recovery potential.

We appreciate your confidence and thank you for your support.

Sincerely,
First Eagle Investments

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* Performance for Class A shares without the effect of sales charges and assumes all distributions have been reinvested, and if a sales charge was included values would be lower.

1. Source: FactSet; data as of December 31, 2025.
2. Source: Municipal Securities Rulemaking Board; data as of December 31, 2025.
3. Source: Municipal Securities Rulemaking Board; data as of December, 2025.
4. Source: Federal Reserve Bank of New York; data as of December 31, 2025.
5. Source: Investment Company Institute; data as of December 31, 2025.
6. Source: Federal Reserve; data as of December 10, 2025.
7. Source: Federal Reserve; data as of December 10, 2025.
8. Source: Reuters; data as of December 23, 2025.
9. Source: National Association of State Budget Officers; data as of November 14, 2025.
10. Source: S&P Global; data as of September 16, 2025.
11. Source: S&P Global; data as of September 30, 2025.
12. Source: BofA Global Research; data as of January 9, 2026.
13. Source: First Eagle Investments; data as of December 31, 2025.

 

The performance data quoted herein represents past performance and does not guarantee future results. Market volatility can dramatically impact the fund’s short term performance. Current performance may be lower or higher than figures shown. The investment return and principal value will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Past performance data through the most recent month end is available at www.firsteagle.com or by calling 800-334-2143. The average annual returns are historical and reflect changes in share price, reinvested dividends and are net of expenses. “With sales charge” performance for class A shares gives effect to the deduction of the maximum sales charge of 2.50%. The average annual returns for Class C shares reflect a CDSC (contingent deferred sales charge) of 1.00% in the year-to-date and first year only. Class I shares require $1MM minimum investment and are offered without sales charge. Class R6 shares are offered without sales charge. Operating expenses reflect the Fund’s total annual operating expenses for the share class of the Fund’s most current prospectus, including management fees and other expenses. 

1. John Miller started as lead portfolio manager of the Fund beginning 2-Jan-2024.

2. First Eagle Investment Management, LLC (the ‘‘Adviser’’) has contractually agreed to waive and/ or reimburse certain fees and expenses of Classes A, C, I, and R6 so that the total annual operating expenses (excluding interest charges on any borrowings, taxes, brokerage commissions and other expenses incurred in placing orders for the purchase and sale of securities and other investment instruments, acquired fund fees and expenses, dividend and other expenses relating to short sales, and extraordinary expenses, if any) (‘‘annual operating expenses’’) of each class are limited to 0.85%, 1.60%, 0.60% and 0.60% of average net assets, respectively. Each of these undertakings lasts until 28-Feb-2026 and may not be terminated during its term without the consent of the Board of Trustees. The Fund has agreed that each of Classes A, C, I, and R6 will repay the Adviser for fees and expenses waived or reimbursed for the class provided that repayment does not cause annual operating expenses (after the repayment is taken into account) to exceed the lesser of: (1)0.85%, 1.60%, 0.60% and 0.60% of the class’ average net assets, respectively; or (2) if applicable, the then-current expense limitations. Any such repayment must be made within three years after the year in which the Adviser incurred the expense.

3. The Adjusted Expense Ratio excludes certain fees and expenses, such as interest expense and fees paid on Fund borrowings and/or interest and related expenses from inverse floaters.

Investments are not FDIC insured or bank guaranteed and may lose value.

The First Eagle High Yield Municipal Fund was known as the First Eagle High Income Fund prior to 27-Dec-2023. First Eagle High Income Fund commenced operations in its present form on 30-Dec-2011, and is successor to another mutual fund pursuant to a reorganization on 30-Dec-2011. Information prior to 30-Dec-2011 is for this predecessor fund. Immediately after the reorganization, changes in net asset value of the Class I shares were partially impacted by differences in how the Fund and the predecessor fund price portfolio securities.

 

Risks

All investments involve the risk of loss of principal.

Diversification does not guarantee investment returns and does not eliminate the risk of loss.

The transition of the First Eagle High Yield Municipal Fund (the “Fund”) from the First Eagle High Income Fund was effected on or about December 27, 2023. There continues to be increased operational risks associated with the transition, during which the Fund has acquired new and additional trading and counterparty relationships, new and additional borrowing and leverage arrangements, and new and additional capabilities for the management of derivatives, and may require more. Beyond the inherent risks of transition and associated complexity, because some, but not all of the required or desirable operational capabilities and investment and counterparty arrangements were fully implemented prior to the effective date of the transition, until such time as that occurs, the Fund’s flexibility to fully implement its new objective and strategies may continue to be limited during the transition period. During the transition period, it is expected that the Fund will not be as invested in income-producing securities that are exempt from regular federal income taxes as will be the case once the transition is complete. As a result, a higher percentage of the Fund’s dividends are expected to be ordinary dividends rather than “exempt-interest dividends” during the transitional phase. Funds whose investments are concentrated in a specific industry or sector may be subject to a higher degree of risk than funds whose investments are diversified and may not be suitable for all investors. Investments in bonds are subject to interest-rate risk and can lose principal value when interest rates rise, while they typically increase their principal values when interest rates decline. Bonds are also subject to credit risk, in which the bond issuer may fail to pay interest and principal in a timely manner, or that negative perception of the issuer’s ability to make such payments may cause the price of that bond to decline. The Fund may invest in high yield, fixed income securities that, at the time of purchase, are non-investment grade. High yield, lower rated securities involve greater price volatility and present greater risks than high rated fixed income securities. High yield securities are rated lower than investment-grade securities because there is a greater possibility that the issuer may be unable to make interest and principal payments on those securities. High yield securities involve greater risk than higher rated securities and portfolios that invest in them may be subject to greater levels of credit and liquidity risk than portfolios that do not. Municipal bonds are subject to credit risk, interest rate risk, liquidity risk, and call risk. However, the obligations of some municipal issuers may not be enforceable through the exercise of traditional creditors’ rights. The reorganization under federal bankruptcy laws of a municipal bond issuer may result in the bonds being cancelled without payment or repaid only in part, or in delays in collecting principal and interest.

 

Definitions

Federal funds rate is the interest rate at which depository institutions (banks and credit unions) lend reserve balances to other depository institutions overnight on an uncollateralized basis. A yield curve is a graphical representation of interest rates on debt of equal credit quality across a range of maturities. Gross domestic product (GDP) measures the total value of all economic output in goods and services for an economy. Exchange-traded funds (ETFs) are listed investment vehicles that seek to provide exposure to a benchmark, index or actively managed strategy.

S&P Municipal Yield Index (Gross/Total) measures the performance of high yield and investment grade municipal bonds. A total-return index tracks price changes and reinvestment of distribution income. S&P Short Duration Municipal Yield Index (Gross/Total) measures the performance of high yield and investment grade municipal bonds with maturities of one to 12 years. A total-return index tracks price changes and reinvestment of distribution income. S&P Municipal Bond High Yield Index (Gross/Total) measures the performance of bonds in the S&P Municipal Bond Index that are not rated or whose ratings are below investment grade. A total-return index tracks price changes and reinvestment of distribution income. Bloomberg US Aggregate Bond Index (Gross/Total) measures the performance of the investment grade, US dollar-denominated, fixed-rate taxable bond market in the US, including Treasuries, government-related and corporate securities, fixed-rate agency MBS (agency fixed-rate and hybrid ARM passthroughs), ABS, and CMBS. A total-return index tracks price changes and reinvestment of distribution income.

Indexes are unmanaged and do not incur management fees or other operating expenses. One cannot invest directly in an index.

The holdings mentioned herein represent the following total assets of the First Eagle High Yield Municipal Fund as of 12/31/2025: Cscda Cmnty Impt Auth Calif Essential Hsg Rev 4.0% 01-oct-2056 (126292AM3 ) CSCDA CMNTY IMPT AUTH CALIF ALTANA APTS REV 0.30%; Black Belt Energy Gas Dist Ala Gas Proj Rev Var 01-nov-2056 (09182TGL5 ) BLACK BELT ENERGY GAS DIST ALA REV 0.90%; Public Fin Auth Wis Toll Rev 5.75% 31-dec-2065 (74448UAD0) SR 400 PEACH PARTNERS LLC 1.57%; Chicago Ill Brd Ed 7.0% 01-dec-2046 (167505RM0 ) CHICAGO ILL BRD ED ST AID REV 0.83%; Arizona Indl Dev Auth Sr Living Rev 6.75% 01-mar-2065 (04052TDM) 0.28%; Florida Dev Fin Corp Rev Var 15-jul-2032 (340618DK0) Brightline Trains FLA LLC 1.16%; Florida Dev Fin Corp Rev Var 01-jul-2057 (340618EB9) Brightline Florida Holdings, LLC 2.97%; Director St Nev Dept Business & Industry Var 01-jan-2065 (25457VBV7 ) BRIGHTLINE WEST 1.53%; Florida Dev Fin Corp Rev Var 15-jul-2059 (340618DY0) BRIGHTLINE TRAINS FLA LLC 0.53%; California Infrastructure & Economic Dev Bk Rev Var 01-jan-2065 (13034A6B1) Brightline West 1.03%.

 

Additional Disclosures

This commentary represents the opinion of the First Eagle Municipal Credit team as of the date noted. The opinions expressed are not necessarily those of the firm. These materials are provided for informational purposes only. These opinions are not intended to be a forecast of future events, a guarantee of future results or investment advice. Any statistics contained herein have been obtained from sources believed to be reliable, but the accuracy of this information cannot be guaranteed. The views expressed herein may change at any time subsequent to the date of issue hereof. The information provided is not to be construed as a recommendation or an offer to buy, hold or sell or the solicitation of an offer to buy or sell any fund or security.

The Fund’s portfolio is actively managed and holdings can change at any time. Current and future portfolio holdings are subject to risk.

The opinions expressed are not necessarily those of the firm. These materials are provided for informational purposes only. These opinions are not intended to be a forecast of future events, a guarantee of future results or investment advice. Any statistics contained herein have been obtained from sources believed to be reliable, but the accuracy of this information cannot be guaranteed. The views expressed herein may change at any time subsequent to the date of issue hereof.

Third-party marks are the property of their respective owners.

The information is not intended to provide and should not be relied on for accounting or tax advice. Any tax information presented is not intended to constitute an analysis of all tax considerations.

This document does not represent a solicitation of any order to buy or sell a security mentioned herein. Nothing here constitutes investment advice or insight as to the merits of any security or investment strategy mentioned herein.

FEF Distributors, LLC (“FEFD”) (SIPC), a limited purpose broker-dealer, distributes certain First Eagle products. FEFD does not provide services to any investor but rather provides services to its First Eagle affiliates. As such, when FEFD presents a fund, strategy or other product to a prospective investor, FEFD and its representatives do not determine whether an investment in the fund, strategy or other product is in the best interests of, or is otherwise beneficial or suitable for, the investor. No statement by FEFD should be construed as a recommendation. Investors should exercise their own judgment and/or consult with a financial professional to determine whether it is advisable for the investor to invest in any First Eagle fund, strategy or product.

Investors should consider investment objectives, risks, charges and expenses carefully before investing. The prospectus and summary prospectus contain this and other information about our funds and may be obtained by visiting our website at www.firsteagle.com or calling us at 800-334-2143. The prospectus or summary prospectus should be read carefully before investing.

First Eagle Funds are offered by FEF Distributors, LLC, a subsidiary of First Eagle Investment Management, LLC, which provides advisory services.