Navigating a Tightrope: Thrivent's High-Yield Municipal Bond Strategy in 2025

The Thrivent High Income Municipal Bond Fund (Class S, THMBX) has long been a staple for investors seeking tax-exempt income through municipal bonds. But in 2025, the fund faces a growing balancing act: maintaining high yields in an environment of rising interest rates and heightened credit risks. As macroeconomic headwinds loom, how is Thrivent managing this delicate equation?

The Fund's Dual Mandate: Yield and Safety

Thrivent's strategy centers on delivering “a high level of current income” via a portfolio of municipal bonds, with at least 50% allocated to below-investment-grade securities (BBB- or lower) or unrated bonds. This focus on high-yield “junk” munis boosts returns but amplifies credit risk. The fund also holds revenue bonds tied to projects like schools and infrastructure, alongside general obligation bonds backed by issuers' taxing power.

The trade-off is clear: While high-yield bonds offer premium income, they are more vulnerable to defaults. Thrivent mitigates this by diversifying across sectors and issuers, but the risk remains.

Rising Rates and Liquidity Challenges

Interest rate risk is another critical factor. Municipal bonds with longer maturities or durations face significant price declines if rates rise. Thrivent's portfolio includes these longer-dated securities, which are also less liquid. Compounding this, reduced dealer inventories of municipal bonds—due to regulatory changes—create liquidity risks.

Thrivent's approach involves active duration management, but the strategy's effectiveness hinges on Federal Reserve policy. With inflation still elevated and the Fed's path uncertain, the fund's sensitivity to rate fluctuations is a double-edged sword.

Credit Risks in a Tightening Economy

The U.S. economy's resilience in early 2025 masks underlying vulnerabilities. Tariff-driven inflation, mixed consumer confidence, and labor shortages could strain issuers' finances. Thrivent's heavy exposure to speculative-grade bonds—often tied to projects reliant on stable tax revenues or project-specific cash flows—adds fragility.

The fund's Q1 2025 outlook likely emphasizes credit research rigor, favoring bonds with strong issuer balance sheets or revenue streams. However, defaults in sectors like healthcare or transportation could still disrupt returns.

Tax Considerations and Investor Suitability

Tax-exempt yields are a key selling point, but investors must navigate complexities. Some bonds may trigger the alternative minimum tax (AMT), while state taxes could erode benefits. Thrivent's focus on nationally diversified holdings aims to reduce geographic concentration risk, but investors must align their tax status with the fund's exposures.

The fund is best suited for those in high marginal tax brackets seeking steady income, with a medium- to long-term horizon to ride out volatility.

Is THMBX Worth the Risk in 2025?

Thrivent's strategy remains viable for income-focused investors willing to accept moderate volatility. The fund's yield advantage over Treasury bonds and investment-grade munis is compelling, especially in a low-yield world. However, the risks are non-trivial:

• Credit risk: Defaults in high-yield municipal sectors could hit returns.
• Interest rate risk: Rising rates could depress bond prices.
• Liquidity risk: Reduced dealer participation may limit exits during market stress.

Investment Takeaways

1. Consider the tax advantage: High earners in AMT-protected states could benefit, but consult a tax advisor.
2. Diversify strategically: Pair THMBX with shorter-duration bond funds or Treasuries to offset volatility.
3. Monitor macro trends: Track the Fed's rate decisions and inflation metrics closely.

Final Analysis

Thrivent High Income Municipal Bond Fund exemplifies the tension between yield and safety in 2025. While its high-yield focus delivers income, the fund's success hinges on navigating rising rates and credit defaults with precision. For the right investor—tax-aware, patient, and willing to trade some return for diversification—THMB, when allocated cautiously, can be a useful component of a bond portfolio. But in an era of uncertain macro outcomes, this fund requires active monitoring.

Investors should proceed with eyes wide open: Thrivent's strategy is a high-wire act, and the economic safety net may be thinning.