Paul Malloy | Source | Head of Municipals at Vanguard

Vanguard called the surge this spring in municipal yields a “renaissance of tax-exempt income.”

Paul Malloy, head of municipal investments at Vanguard, said rising yields should benefit patient long-term investors.

“One of the things we see frequently in municipal markets is a herding effect and people chasing returns on the upside and then, on the downside, saying, ‘Oh, no, I better get out.’ That kind of market timing is something we constantly warn municipal investors against.”

Both muni-bond executives said they don’t want to take excessive risks to earn yield after a decade’s worth of economic expansion. That conservative approach is one important way they both fit in on Vanguard’s campus.

“While we’re not calling for a recession, we’re respecting the recession signals,” said Malloy. “This late in the cycle, it’s nearly impossible to predict and time the end, but we can certainly stay away from stuff that’s most exposed.”

Paul Malloy, the head of municipals at Vanguard Group Inc., is seeing signs of a revival in the $4 trillion market that he expects will stretch into 2023, in part as this year’s surge in yields lures investors back to state and city debt.

Yields on benchmark 10-year munis are still more than double their level at the start of the year, even after dropping in recent weeks on signs of ebbing inflation pressure. What’s more, pandemic relief aid and swelling tax revenue have helped shore up the finances of US states and local governments.

It’s “a really great point to re-enter municipals for the long-run given the increased yields in the marketplace on top of some of the best credit quality that we’ve had in decades,” Malloy, who oversees $228 billion, said in an interview. “It sets us up for a 2023 that we like to call a muni renaissance.”