Vanguard’s Malloy Says Muni Yields Bolster Second-Half Outlook

Attractive yields and strong credit fundamentals are setting the municipal bond market up for a solid second half of the year, said Paul Malloy, the head of municipals at The Vanguard Group Inc.

Investors in the highest tax bracket can collect a broad muni-market yield of 3.62%, equivalent to 6.1% on a taxable security. The latter surpasses US corporate bonds, yielding 5.26% and having a higher default rate.

“You’ve got some really good yield back into the muni market and you’ve got a pretty steep curve,” Malloy, who oversees $300 billion in muni assets, said in an interview. “You’re paid to wait in the tax-exempt space and for whatever reason you get any sort of major economic volatility, it still serves as ballast in a broader fixed-income portfolio.”

Investors have poured $46 billion into the muni market this year, running at the second-highest rate on record, JPMorgan Chase & Co. wrote in a June 5 report. The market’s 1.74% total return year to date bests a 0.08% return for US corporate bonds and close to 0.5% loss for US Treasuries, according to Bloomberg Indexes.

The nearly 1.9 percentage point difference between 2-year and 30-year muni yields has attracted cash to long-end of the market, Malloy said. The run-up in stocks has also led some investors to reallocate to munis to keep their portfolios in balance. The municipal debt market could end the year with a 3.5% return, he said.

Malloy also touched on the following: