High-yield municipal bond demand remains strong but selective, buysiders say, despite mixed recent fund flows and the failure of one of the year’s largest unrated deals to clear the market last week.

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“I’ve been in the business for 25 years and usually the summer is pretty quiet and a little boring,” said Bryce Pickering, head of municipal trading for the muni credit team at First Eagle Investments. “But this summer people are struggling to find time to take a vacation,” he said. “We’ve digested a lot of supply and the market hasn’t even burped; it’s all been very orderly and comfortable.”

Meanwhile, resolving the restructuring of Brightline Florida — the struggling train line held by some of the high-yield market’s largest investors — would likely boost demand, even if bondholders take a loss, some investors said.

While the investment-grade market has enjoyed elevated supply of $348.1 billion so far this year, volume has been more modest on the high-yield side, according to Bloomberg. High-yield and nonrated issuance make up 6.6% of total issuance year-to-date, the data shows.

High-yield and nonrated issuance fell 8% year-over-year through the first half, Nuveen said in a third-quarter outlook report.

New issue high-yield supply has been “stubbornly sporadic,” said Lind Capital Partners, which specializes in unrated debt, in an Aug. 3 client note.

“Investor demand continues to outpace subdued supply, making it increasingly difficult to deploy capital in the slow summer months,” Lind said. “Activity should increase meaningfully in September and through the fourth quarter,” the firm said, adding that more than 40% of its purchases come in the final three months of the year.

On the demand side, after outflows from high-yield funds during the last two weeks of July, flows reversed last week with $530.3 million of inflows. That continues a trend set so far this year, which has seen strong inflows into high-yield mutual funds.

“There’s just a ton of demand,” Pickering said. “While supply on the high-yield side hasn’t been as high as the investment-grade market, there’s always something new and interesting coming,” but it hasn’t been “overwhelming,” he said. “That’s probably why it’s been kind of grabby.”

The demand has its limits, however. As shown by the recent outflows, appetite seemed to slow in July. Deals that were 25 to 30 times oversubscribed six months ago are now 10 to 12 times oversubscribed, an investor said.

And last week’s failure of a $610 million unrated behavioral health deal to clear the market indicated to some that investors are becoming more picky.

Larger, more speculative deals may have a harder time getting placed, said Mohammed Murad, head of municipal credit research at PTAM.

“Larger deal size can look like it means better liquidity, but when a deal struggles to get placed — or needs reworking — that’s usually the market potentially signaling discomfort with the underlying credit, whether that’s too much leverage and aggressive assumptions baked into the structure, or insufficient hard collateral,” he said.

Currently, investors have alternatives in high yield that pay less but offer less of that speculative edge at similar rating levels, according to Murad.

“There’s more dispersion in the market than this time last year,” said Miguel Laranjeiro, investment director for municipal debt at Aberdeen Investments. “There are more winners and losers within certain sectors, and a lot of that goes back to fundamental credit work,” he said. “The market is broadly healthy and the technical background is really constructive for high yield,” he said. “But this year the market is more credit-driven and more driven by fundamentals.”

Some investors said the widely expected restructuring and haircut of the $5.5 billion of Brightline debt may act as a tailwind as it closes a years-long saga that’s been an overhang on the unrated muni market.

Brightline is its own segregated issue, highly concentrated in a few holders, said James Welch, municipal portfolio manager at Principal Asset Management.

“I don’t see a tail wagging the dog effect with Brightline as it relates to the rest of the market,” Welch said, adding that it’s a well-known credit.

“Its story has been well telegraphed, so there’s no surprise there,” he said.

Laranjeiro said a resolution would remove a headwind for the market.

“I do think there is a lot of capital tied up in the Brightline complex, so maybe some of the longer risk takers in the high-yield market don’t have the capital available, and that niche of the investment pool is a bit smaller than it has been in the past,” he said. “So having some resolution would probably free up some capital on the buyside for more of the risky deals.”