Commentaries

Short Duration High Yield Municipal Fund Commentary

Short Duration High Yield Municipal Fund Commentary

Market Overview

As of September 30, 2025

The technical headwinds that held back municipal bond performance in the second quarter finally began to ease in the third quarter, setting the stage for a rally in September.

Though muni issuance remained robust over the last three months, renewed flows into mutual funds and exchange-traded funds following April’s tariff-related dislocation helped the market absorb the new supply. The resulting performance pushed muni indexes well into positive territory for the year to date following a sluggish first half, though they still lag other fixed income assets. The S&P Municipal Bond High Yield Index gained 2.3% during the third quarter, while the S&P Municipal Yield Index, which includes bonds across the quality spectrum, rose 2.6% and the S&P Short Duration Municipal Yield Index advanced 1.8%; year to date, those indexes are up a respective 1.7%, 1.8% and 3.6%. For context, the Bloomberg US Aggregate Bond Index gained 2.0% during the quarter and 6.1% thus far in 2025.1

Continued Heavy Supply Was Met by Renewed Demand 

Long US Treasury yields eased slightly in the third quarter, with 10-year and 30-year rates posting single-digit declines. The AAA muni curve was a bit more active, with bonds of those same maturities declining 30 basis points or so.2

While municipal bonds had a good quarter, perhaps more impressive than the magnitude of returns was that they were achieved in the face of continued heavy new supply. Third quarter issuance was down slightly from the second quarter, but the year-to-date pace suggests 2025 is likely to top 2024’s record for annual volume. Notably, the long-dated nature of high yield muni issuance in general provides a steepening impulse to the yield curve, and the municipal bond curve has steepened considerably amid the flood of issuance.3

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 due to the impact of inflation across inputs like steel, concrete, lumber, civil engineering, skilled and unskilled labor, etc. Further, potential legislative threats to muni bond tax treatment—since alleviated—likely pulled forward some issuance to the first half of the year.

Fortunately, supply during the third quarter was met by renewed demand; after about $9 billion of outflows during late March and April alongside the initial shock of Trump’s tariff policies, positive municipal bond fund flows returned in May and have persisted.4 Though tariffs remain a wildcard, investors seem to have gotten comfortable with the uncertainty. The worst of the expected inflationary impacts haven’t yet been realized, and signs that the most severe levies could be walked back, either through bilateral negotiation or judicial mandate, lends hope that trade policy may be less of a headwind.

Meanwhile, the passage of the budget reconciliation bill in early July removed an overhang to muni bond demand. Putting aside the provisions of the bill, the key for muni bond investors is what the bill lacked—namely, any adjustments to the tax-exempt status of municipal bond interest income. There had been some chatter that policymakers were considering changes to or restrictions on the muni bond tax exemption as part of this tax-and-spending plan. While a disruption to the status quo seemed an unlikely result of the recent legislative process, the certainty provided by the final bill was welcomed by both investors and issuers.

Also supporting demand for muni bonds has been the dovish tilt of the Federal Reserve. Throughout the third quarter investors sought to get a clear read on the central bank struggling to balance the weakening labor market against above-target inflation. Deciding the former is of greater concern at the moment, the central bank delivered a well-telegraphed 25 basis point cut to its policy rate in September, and markets have priced in an additional 50 basis points of rate cuts by year end.5 Should the Fed’s more accommodative policy continue to weigh on long-term yields, investors may increasingly view municipal bonds as a more appealing cash equivalent.

Fundamentals Remain Encouraging 

Municipalities entered 2025 in strong fiscal condition, and issuer fundamentals continue to be supportive. State budgets for fiscal 2026 generally reflect a healthy environment, with fund balances well above the historical average.6 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 that have been enacted to date call for only small increases in general fund spending, and most states plan to maintain or increase the size of their state’s rainy-day fund—many of which are already at nominal highs—in anticipation of future needs.

Another sign of fiscal strength can be found in improvement in 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.7

All in all, muni bond ratings activity has continued to be positive in 2025, but just barely: positive activity (including both upgrades and favorable outlook revisions) outpaced negative activity at a rate of 1.1x year to date; this ratio stood at 3.5x in 2022.8 Defaults remain very low, even by the standards of an asset class accustomed to very low default activity.9

Start of a Turnaround? 

Year-to-date muni bond performance flipped from negative to positive during the third quarter, and we’re hopeful that the period represented an inflection point after what was a challenging first half for the asset class. 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.

With a yield to worst of 5.7%, the Bloomberg US High Yield Municipal Index continues to offer investors an attractive entry point, in our view.10 Although the outperformance of munis during the quarter pushed muni-Treasury ratios somewhat lower, current levels—70% for 10-year and 90% for 30-year maturities—suggest there is still significant relative value to be found on the longer end of the municipal bond curve, which is also most likely to benefit from an environment of stable or declining rates given its current steepness.11

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.

Portfolio Review

Short Duration High Yield Municipal Fund A Shares (without sales charge*) posted a return of 0.06% in third quarter 2025. The Fund underperformed the S&P Short Duration Municipal Index in the period.

The leading contributors to performance during the quarter were bonds linked to the Brightline passenger rail projects in Florida and California/Nevada, a health care facility expansion in New York and the refurbishment of an airport maintenance base in Oklahoma.

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. It also recently broke ground on Brightline West, which is expected to connect the 200-plus miles between Southern California and Las Vegas with all-electric, high-speed service beginning in 2028.

Bonds related to Brightline’s Florida projects have come under pressure in 2025 and have been 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 a lone subordinate tranche of debt; while this did not qualify as a default based on the structure of the affected issues, the news weighed on the prices of other uninsured bond tranches. However, certain of Brightline Florida’s “commuter” bonds were retired in mid-August at a price above par as part of mandatory redemption— explaining their contribution to fund performance—and were replaced with a new issue featuring a higher coupon rate and enhanced structural provisions.

Fortress Investment Group is pursuing a broad equity raise of the Brightline franchise which could be finalized over the next couple of quarters. Proceeds of any future equity sale would be utilized to redeem outstanding subordinate debt whose bond valuations have been negatively impacted over the past three months. This would be a positive future catalyst if successfully executed. In the interim, recent operating trends have been bullish. The company has put into service 20 standard cars over the past several months and appears to be growing into its expanded seat capacity nicely, posting year-over-year increases in both short- and long-distance passengers. The delivery of 10 new premium cars by year end should enhance average long-distance fares and improve ridership trends within the premium fare class, which have been a drag. In addition, the company is planning to implement a schedule change in the fourth quarter to better align network capacity with fluctuating demand.

All in all, we remain confident in Brightline’s ability to meet its obligations as it continues to mature, and we believe the attractive coupons on offer adequately compensate us for the risk involved.

Though structurally independent from the company’s Florida operations, Brightline West bonds have often traded in sympathy with the Florida issues. Prices moved higher during the quarter as Brightline West announced plans to refund an outstanding bond tranche at the stipulated above-par price sometime during the fourth quarter. Meanwhile, the price tag for the Brightline West project has climbed thanks to inflation pressures. To absorb these higher construction costs, Brightline West has applied for a $6 billion Railroad Rehabilitation Improvement Financing loan from the Federal government to absorb construction costs that have risen to $21 billion from the previous estimate of $15 billion. This loan represents a far more cost-effective approach to financing than the higher-cost bank loans that were originally expected to fund a good portion of construction costs, and we believe it is very likely to be approved given the favorable views of the Brightline franchise held by the Trump administration and Department of Transportation.

The top-performing bonds during the quarter were issued by a Westchester County, New York, authority to refinance debt and provide working capital as new management begins to turn the health system around. Also trading higher were bonds issued by the Tulsa Municipal Airport on behalf of American Airlines to finance improvements in the carrier’s overhaul and maintenance base.

The leading detractors in the quarter were linked to the aforementioned Brightline passenger rail projects in Florida and California/ Nevada and a mall in New Jersey.

A relatively small holding in the portfolio, PILOT (payment in lieu of taxes) bonds associated with the American Dream entertainment and retail center in the Meadowlands Sports Complex are secured by tax payments that are based on the assessed value of the property. A reduction in the mall’s assessed value—and thus payments to be made to bondholders—by both the local taxing authority and a tax court judge have weighed on the bonds’ prices.

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 September 30, 2025.
2. Source: Bloomberg, US Department of Treasury; data as of September 30, 2025.
3. Source: Municipal Securities Rulemaking Board; data as of September 30, 2025.
4. Source: Investment Company Institute; data as of October 1, 2025.
5. Source: CME FedWatch; data as of October 13, 2025. 
6. Source: National Association of State Budget Officials; data as of September 4, 2025.
7. Source: S&P Global; data as of September 16, 2025.
8. Source: S&P Global; data as of September 30, 2025.
9. Source: Moody’s Investors Service; data as of December 31, 2024.
10. Source: Bloomberg; data as of September 30, 2025.
11. Source: Bloomberg, US Department of Treasury; data as of September 30, 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%. 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. 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.

2. 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 annual expense ratio is based on expenses incurred by the Fund, as stated in the most recent prospectus.

Fee waivers were in effect for some of the periods shown. Had fees not been waived and/or expenses reimbursed, returns would have been lower.

 

Risk Disclosures

All investments involve the risk of loss of principal.
Diversification does not guarantee investment returns and does not eliminate the risk of loss.

The First Eagle Short Duration High Yield Municipal Fund (“The Fund”) is new and may not be successful under all future market conditions. The Fund may not attract sufficient assets to achieve investment, trading or other efficiencies.

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. Strategies 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.

 

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. 

Yield to worst is a measure of the lowest possible yield that can be received on a bond that operates within the terms of its contract without defaulting.

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 measures the performance of high yield and investment grade municipal bonds with maturities of one to 12 years. 

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 High Yield Municipal Bond Index (Gross/Total) measures the performance of the non-investment grade US tax-exempt bond market. 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 Short Duration High Yield Municipal Fund as of 30-Sep-2025: Westchester Cnty N Y Loc Dev Corp Rev 6.5% 01-nov-2030 (95737TFV3) WESTCHESTER CNTY HEALTH CARE CORP OBLIGATED GROUP 2.20%; Florida Dev Fin Corp Rev 8.25% 01-jul-2057 (340618DZ7) Brightline FLA Hldgs LLC 0.00%; Florida Dev Fin Corp Rev Var 01-jul-2057 (340618EB9) Brightline Florida Holdings, LLC 3.23%; California Infrastructure & Economic Dev Bk Rev Var 01-jan-2065 (13034A6B1) Brightline West 0.93%; Tulsa Okla Mun Arpt Tr Rev 6.25% 01-dec-2035 (899661EM0) AMERICAN AIRLS INC 1.21%; Florida Dev Fin Corp Rev Var 15-jul-2032 (340618DK0) Brightline Trains FLA LLC 1.23%; Florida Dev Fin Corp Rev Var 15-jul-2059 (340618DY0) BRIGHTLINE TRAINS FLA LLC 0.68%; Nevada Dt Dept Business & Ind Rev Var 01-Jan-2065 (641455AB6) Brightline West 2.89%; Florida Dev Fin Corp Rev 5.0% 01-jul-2036 (340618DM6) BRIGHTLINE TRAINS FLA LLC 0.38%; Public Fin Auth Wis Ltd Oblig Pilot Rev 6.5% 01-dec2037 (74446HAB5) AMEREAM LLC 0.14%.

 

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 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.

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.

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 viewed at www.firsteagle.com. You may also request printed copies by calling us at 800-747-2008. Please read our prospectus carefully before investing. 

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