Information on the breeding biology of Mistletoe Tyrannulet is based on Skutch (1960), who detailed the nesting biology of this species in Costa Rica. In this region, breeding is initiated in the dry season (January to March), and continues to July or even, rarely, to August (Skutch 1960, Stiles and Skutch 1989). Nest-building is reported from Panama in late February, and nestlings in July (Willis and Eisenmann 1979).
The nest is a vertically-oriented oval shape with an entrance on the side, typically built into drooping moss or lichens below a horizontal limb, and occasionally within dried Cecropia leaves. Skutch observed two nests of Mistletoe Tyrannulet that were built into the lower part of an inactive nest of Yellow-olive Flycatcher (Tolmomyias sulphurescens). Nests are constructed ca 2-15 meters above the ground in dead or living trees, and apparently are constructed solely by the female. The nest is composed of mosses, fibers, and other vegetation, assembled using spider webs, and lined with soft materials from seeds.
The clutch is two; the eggs are dull white or whitish with rusty speckling (Skutch 1960). Eggs are laid in the morning, but well after sunrise (Skutch 1960). Mean egg dimensions are 17.5 x 13.2 mm (n = 7, range 16.7-18.7 mm x 12.7-13.5 mm; Skutch 1960)
Only a single individual, presumably the female, incubates the eggs (Skutch 1960). At one nest, observed over a period of five hours, incubation sessions lasted for a mean of 32.1 minutes (range 8-75 minutes, n = 7 sessions), with a mean recess of 12.5 minutes (range 10-18 minutes); and at a second nest, observed for six hours, incubation sessions lasted for a mean of 27.4 minutes (range 22-35 minutes, n = 8 sessions), with a mean recess of 13.3 minutes (range 10-24 minutes) (1960, 1997). Incubation lasts 16-17 days, and the nestlings remain in the nest for 18-20 days. The mistletoe-dominated diet extends to the nestlings, with parents regurgitating drupes to the nestlings. The nestlings regurgitate the seeds in and around the nest. Nestlings' digestive systems are apparently less efficient processing the drupes, as the seeds that are regurgitated may still have some sticky pericarp remaining, and the parents may eat these regurgitated seeds (Skutch 1997). In Costa Rica, Mistletoe Tyrannulets may nest twice in a year. Skutch (1997) monitored 39 Mistletoe Tyrannulet nests in Costa Rica, and 41% successfully produced young.