Evaluating the Strategic Case for American Century California High-Yield Municipal Fund Amid 2025 Market Dynamics

In the evolving 2025 market landscape, investors seeking tax-advantaged income face a unique confluence of challenges and opportunities. The American Century California High-Yield Municipal Fund (BCHYX) has emerged as a focal point for those navigating the interplay between rising interest rates and the tax benefits of municipal bonds. This analysis evaluates the fund’s strategic positioning, leveraging high-yield municipal bonds to capitalize on a steepening yield curve and a resilient credit environment, while addressing risks inherent in a volatile rate environment.

The 2025 Rate Environment and Municipal Bond Dynamics

Interest rate projections for 2025 suggest a gradual decline in mortgage rates, though they remain elevated compared to historical norms. The 30-year fixed mortgage rate averaged 6.56% in late August 2025, with projections indicating a potential drop to 6% by 2026 [1]. However, the Federal Reserve’s cautious approach—maintaining the federal funds rate unchanged for five consecutive meetings—has limited immediate relief for bond markets. Crucially, municipal bond yields have outperformed Treasuries, with the municipal yield curve steepening significantly. Short-term municipal yields have declined, while long-term yields rose by approximately 50 basis points more than their Treasury counterparts, reflecting strong demand for tax-exempt income [2].

This steepening curve creates a favorable backdrop for high-yield municipal bonds, which offer enhanced spreads and yield per unit of duration. For tax-sensitive investors, the combination of attractive yields at the long end of the curve and a robust summer reinvestment environment has made munis a compelling alternative to cash [3].

Strategic Positioning of the American Century California High-Yield Municipal Fund

The American Century California High-Yield Municipal Fund is designed to provide investors with a high level of tax-free income, with at least 80% of its assets allocated to municipal securities exempt from federal and California income taxes [4]. Its strategy emphasizes a 50-50 weighting between investment-grade and high-yield municipal bonds, mirroring the S&P Municipal Bond California Investment Grade and High Yield Indexes [5]. This balanced approach allows the fund to capitalize on the steepening yield curve while mitigating downside risk through diversification.

A key strength of the fund lies in its active duration management. As of September 2025, the fund’s effective duration stands at 8.93 years, reflecting a weighted average sensitivity to interest rate changes [6]. Comanagers adjust the portfolio’s duration to stay within 1.0 year of a reference California long-term municipal benchmark, a strategy that aligns with the fund’s objective of balancing income generation with interest rate risk [7]. This flexibility is critical in a rising rate environment, where static duration profiles can erode returns.

Credit Quality and Risk Management

High-yield municipal bonds, while offering higher yields, come with elevated credit risk. The fund’s portfolio includes a mix of rated and unrated securities, with the latter evaluated by the investment advisor for credit quality [8]. Despite challenges such as widened credit spreads in Q2 2025—driven by interest rate volatility and fiscal policy uncertainty—the fund’s managers have emphasized rigorous credit research and security selection [9]. For instance, the fund avoided overexposure to troubled issuers like Brightline Trains and American Dream Mall, which faced debt sustainability concerns [10].

The fund’s credit quality distribution remains robust, with a focus on high-yield securities rated below investment grade or deemed equivalent by the advisor. While municipal bonds historically exhibit lower default rates than corporate counterparts, the current low-spread environment offers limited compensation for incremental risk [11]. This underscores the importance of active management in identifying undervalued credits and avoiding overleveraged issuers.

Performance and Competitive Positioning

Despite early-quarter headwinds, the fund has demonstrated resilience. As of August 29, 2025, it posted a year-to-date total return of -2.41%, outperforming the iShares California Muni Bond ETF (CMF) in 10-year annualized returns (2.40% vs. 1.71%) [12]. While its 0.49% expense ratio is higher than CMF’s 0.25%, the fund’s active strategy and tax-exempt focus justify the premium for investors prioritizing income over cost efficiency.

The fund’s trailing twelve-month dividend yield of 3.62% further enhances its appeal in a high-yield environment [13]. As the municipal market normalizes, the fund’s ability to rotate into longer-duration securities and leverage tax-loss harvesting opportunities positions it to outperform in a lower-rate scenario [14].

Strategic Adjustments and Forward-Looking Outlook

The fund’s managers have proactively adjusted the portfolio in response to 2025’s market dynamics. For example, they increased allocations to shorter-duration high-yield bonds during periods of rate volatility, capitalizing on the steepening curve [15]. Additionally, the fund has benefited from strong fund flows, including a $1.5 billion conversion to an exchange-traded fund structure, which has bolstered liquidity [16].

Looking ahead, the fund’s strategic case hinges on its ability to navigate potential rate cuts in the second half of 2025. While the Federal Reserve’s September rate cut is expected to have limited impact on mortgage rates, a broader easing of monetary policy could further steepen the municipal yield curve [17]. The fund’s active duration management and focus on tax-exempt income make it well-positioned to capitalize on these developments.

Conclusion

The American Century California High-Yield Municipal Fund offers a compelling strategic case for investors seeking tax-advantaged income in a rising rate environment. By leveraging a balanced approach to credit quality, active duration management, and rigorous security selection, the fund navigates the complexities of 2025’s market dynamics while maintaining a focus on income generation. While challenges such as spread compression and fiscal policy uncertainty persist, the fund’s adaptability and strong management team position it to deliver competitive returns in the evolving municipal bond landscape.

Source:
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[2] Municipal Market Commentary [https://www.nuveen.com/en-us/insights/municipal-bond-investing/municipal-market-update]
[3] Six Key Themes for Today's Municipal Bond Market [https://www.lordabbett.com/en-us/financial-advisor/insights/markets-and-economy/2025/six-key-themes-for-todays-municipal-bond-market.html]
[4] American Century California High Yield Municipal Fund [https://fundresearch.fidelity.com/mutual-funds/summary/025075201]
[5] California High-Yield Municipal Fund [https://www.americancentury.com/invest/funds/california-high-yield-municipal/bchix/]
[6] American Century CA High Yield Muni Y ACYHX [https://www.morningstar.com/funds/xnas/acyhx/quote]
[7] Fund Analysis – American Century CA High Yield Muni C [https://www.morningstar.com/funds/xnas/caycx/analysis]
[8] American Century CA High Yield Muni I BCHIX Portfolio [https://www.morningstar.com/funds/xnas/bchix/portfolio]
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[11] Why Municipal Bonds [https://www.americancentury.com/advisors/client-conversations/tax-managed-solutions/]
[12] BCHYX vs. CMF — Investment Comparison Tool [https://portfolioslab.com/tools/stock-comparison/BCHYX/CMF]
[13] California High-Yield Municipal Fund [https://www.americancentury.com/invest/funds/california-high-yield-municipal/bchyx/]
[14] Active Fixed Income Perspectives Q3 2025: The Power of Income [https://advisors.vanguard.com/insights/article/series/active-fixed-income-perspectives]
[15] American Century California High-Yield Municipal Fund Q2 ... [https://seekingalpha.com/article/4819095-american-century-california-high-yield-municipal-fund-q2-2025-commentary]
[16] Weekly Fixed Income Commentary | 08/25/2025 [https://www.nuveen.com/en-us/insights/investment-outlook/fixed-income-weekly-commentary]
[17] 2025 Global Fixed Income Outlook [https://www.americancentury.com/plan/investment-outlook/global-fixed-income/]