1. Confidential Vanguard Municipal Market Outlook Philadelphia FPA May 17, 2011 Mike Kobs Senior Portfolio Manager Muni Bond Group

2. > 2 Confidential General Overview of the Municipal Market Review of Current Market Conditions Vanguard’s position on default risk and public pension underfunding Municipal Bond Market Outlook Q&A Municipal Bond Market Presentation

3. > 3 Confidential Issuers are typically state and local governments and not- for-profit entities Most municipal debt provides a tax-advantage for investors Borrowing cost advantage for issuers Relatively high credit quality Large number of independent issuers/credits Municipal securities are exempt from registration with the SEC Unique Characteristics of the U.S. Municipal Securities Market

4. > 4 Confidential “General Obligation” Notes and Bonds – Backed by the full faith and credit of a state or local government – All sources of revenue, unless specifically limited, will be used to pay debt service on the bonds “Revenue” Notes and Bonds – Issued to finance specific revenue-generating projects or utility systems – Secured solely by the revenues from the financed project or system How are U.S. Municipal Borrowings Secured?

5. > 5 Confidential $2.925 Trillion outstanding 50,000+ Issuers 1.18 million cusips How big is the Municipal Bond Market? Source: MSRB 2010 FactBook

6. > 6 Confidential Core Inflation Momentum Factors Municipal Bond Market- Credit Quality and Sectors

7. > 7 Confidential Municipal Bond Market- New Issuance Supply The Bond Buyer Source: The Bond Buyer

8. > 8 Confidential Municipal Bond Market- Holders of Municipal Debt Federal Reserve Board, Flow of Fund Accounts Source: Federal Reserve Board, Flow of Fund Accounts

9. > 9 Confidential Core Inflation Momentum Factors Municipal rates have risen from historical low levels

10. > 10 Confidential Core Inflation Momentum Factors Credit Quality Spreads

11. > 11 Confidential Core Inflation Momentum Factors Municipals look attractive versus high quality alternatives 10-Year Comparison 5/6/2011 MuniCorporate Quality Credit SpreadAAA (MMD)Yield Tax Eq Yield* Credit SpreadUSTYieldVs CorpVs Tsy AAA172.742.914.48293.183.471.011.30 AA562.743.305.08993.184.170.911.90 A1542.744.286.581313.184.492.093.40 BBB2112.744.857.461703.184.882.584.28 *35% Federal Tax Bracket

12. > 12 Confidential Core Inflation Momentum Factors Historical Municipal Default Statistics.89% [238 defaults (1999-2009)].04% [10 defaults (1999-2009)] 1.54% [1,604 defaults (1986-2008)].02% [10 defaults (1986-2008)] 1.57% [1,707 defaults (1970-2009)].01% [54 defaults (1970-2009)] 1.Moody’s Investors Services, U.S. Municipal Bond Defaults and Recoversies, 1970-2009 (February 2010); Moody’s Investors Service Corporate Default ad Recovery Rates, 1920-2009 (February 2010). Percentags based upon average one year default rate. 2.Standard & Poors, 2009 Global Corporate Default Study and Ratings Transitions (March 17,2010); Standard & Poor’s; U.S. Municipal Ratings Transitions and Defaults, 1976-2009 (March 17,2010); Standard & Poor’s; U.S. 3.Fitch Ratings Inc. U.S. Public Finance Transition and Default Study (1999-2009), March 25,2010; Fitch Ratings Global Corporate Finance 2009 Transition and Default Study.

13. > 13 Confidential Over the Counter Market 100’s of dealers 1.2% of securities outstanding trade daily on average, most of these trades are in denominations of less than $100,000 par value Evaluations are done daily by two pricing services: Thompson/JJ Kenny and IDC Muller Pricing convention is on a Yield to Worst basis Municipal Market Trading Conventions

14. > 14 Confidential Steep Yield Curve Cheap relative to Treasuries Wider Credit Spreads Headline Risk Regulatory Rhetoric Current Market Conditions

15. > 15 Confidential Steep Yield Curve

16. > 16 Confidential Cheap relative to Treasuries

17. > 17 Confidential Core Inflation Momentum Factors State and Local Government Challenges Pensions – the biggest long term challenge due to constitutional and statutory protections (estimates up to $3 trillion unfunded liability depending on discount rates selected) OPEB – huge promise to retirees with estimates up to $700 billion unfunded liability, generally pay-as-you-go; can be altered by legislature Medicaid – on the way to becoming largest line item in state budgets Education – continuing to be squeezed, particularly with the loss of ARRA funding Debt – much discussion of default, but debt burden remains within historical norms

18. > 18 Confidential Source: Rockefeller Institute

19. > 19 Confidential Source: Rockefeller Institute

20. > 20 Confidential Source: Rockefeller Institute

21. > 21 Confidential Source: Rockefeller Institute

22. > 22 Confidential Core Inflation Momentum Factors Municipal interest cost is manageable

23. > 23 Confidential Core Inflation Momentum Factors Unfunded Actuarial Liabilities from Pensions and OPEBs

24. > 24 Confidential Core Inflation Momentum Factors Debt levels have risen but are within historical norms

25. > 25 Confidential Core Inflation Momentum Factors Municipal Market Outlook Yield Curve – Flattening as Fed Tightens Credit Spreads – Wider than historical averages, differentiation in credit Headline Risk – As the budget process moves forward, difficult decisions about cutting services and raising revenues will be played out in the press Legislation Risk – Many initiatives to replace the tax-exemption in Munis will play out in the media and generate volatility depending on what form gains traction

26. > 26 Confidential Core Inflation Momentum Factors Q&A What concerns your clients about the Municipal Market?