Vanguard Municipal Bond Funds

Annual Report | October 31, 2021

Vanguard Municipal Bond Funds

Vanguard Short-Term Tax-Exempt Fund Vanguard Limited-Term Tax-Exempt Fund Vanguard Intermediate-Term Tax-Exempt Fund Vanguard Long-Term Tax-Exempt Fund Vanguard High-Yield Tax-Exempt Fund

Contents Your Fund's Performance at a Glance. . . . . . . . . . . . . . . 1 Advisor's Report. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 About Your Fund's Expenses . . . . . . . . . . . . . . . . . . . . . . . 4 Short-Term Tax-Exempt Fund . . . . . . . . . . . . . . . . . . . . . . . 6 Limited-Term Tax-Exempt Fund . . . . . . . . . . . . . . . . . . . . .102 Intermediate-Term Tax-Exempt Fund. . . . . . . . . . . . . . . .251 Long-Term Tax-Exempt Fund. . . . . . . . . . . . . . . . . . . . . . . .460 High-Yield Tax-Exempt Fund . . . . . . . . . . . . . . . . . . . . . . . .518

Please note: The opinions expressed in this report are just that--informed opinions. They should not be considered promises or advice. Also, please keep in mind that the information and opinions cover the period through the date on the front of this report. Of course, the risks of investing in your fund are spelled out in the prospectus.

Your Fund's Performance at a Glance

? For the 12 months ended October 31, 2021, the returns for the five Vanguard tax-exempt bond funds discussed in this report ranged from 0.41% for Investor Shares of Vanguard Short-Term Tax-Exempt Fund to 5.89% for Admiral Shares of Vanguard High-Yield Tax-Exempt Fund. All of the funds posted returns roughly in line with or better than their expense-free benchmarks.

? The global economy continued to recover from the sharp pandemic-induced contraction in the spring of 2020. Countries that were more successful in containing the virus, whether through vaccinations, lockdowns, or both, generally fared better economically. Swift and extensive fiscal and monetary support from policymakers was also key to the rebound. That included $350 billion in fiscal support specifically for state and municipal governments.

? The funds were generally overweighted in credit sectors when the period began based on our forecast of a continuing economic recovery and ongoing fiscal and monetary support. That paid off as the best-performing segment of the muni market was BBB-rated debt.

? With muni yields at the front end of the curve at very low levels, the advisor kept the duration of the Vanguard Short-Term Tax-Exempt Fund and Vanguard Limited-Term Tax-Exempt Fund shorter than their benchmarks for the better part of the year.

Market Barometer

Stocks Russell 1000 Index (Large-caps) Russell 2000 Index (Small-caps) Russell 3000 Index (Broad U.S. market) FTSE All-World ex US Index (International)

Bonds Bloomberg U.S. Aggregate Bond Index (Broad taxable market) Bloomberg Municipal Bond Index (Broad tax-exempt market) FTSE Three-Month U.S. Treasury Bill Index

CPI Consumer Price Index

Average Annual Total Returns Periods Ended October 31, 2021

One Year

Three Years

Five Years

43.51% 50.80 43.90 30.23

22.01% 16.47 21.62 12.42

19.16% 15.52 18.91 10.05

-0.48% 2.64 0.05

6.22%

5.63% 5.17 1.08

3.03%

3.10% 3.41 1.12

2.73%

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Advisor's Report

For the 12 months ended October 31, 2021, Vanguard's five national tax-exempt bond funds posted returns ranging from 0.41% for Investor Shares of Vanguard Short-Term Tax-Exempt Fund to 5.89% for Admiral Shares of Vanguard High-Yield Tax-Exempt Fund. All of the funds posted returns roughly in line with or better than their expense-free benchmarks.

The funds' 30-day SEC yields declined by between 20 and 66 basis points to range from 0.12% for Investor Shares of the Short-Term Tax-Exempt Fund to 1.70% for Admiral Shares of the High-Yield Tax-Exempt Fund. (A basis point is one-hundredth of a percentage point.)

Please note that the funds are permitted to invest in securities that would generate income distributions subject to the alternative minimum tax (AMT). During the fiscal year, only the High-Yield Tax-Exempt Fund owned such securities.

The investment environment Shortly after the beginning of the fiscal year, news of promising clinical trial data for COVID-19 vaccines helped lift the outlook for the global economy, especially for those sectors that had been hardest-hit by restrictions and lockdowns. Yet the recovery has been uneven. Countries that contained the virus more successfully, mostly in Asia, maintained better economic momentum through the health crisis, while those ahead of the curve in vaccinations were quicker to rebound.

Yields of U.S. Treasury Securities

Maturity 2 years 5 years 10 years 30 years Source: Vanguard.

Governments and central banks in developed markets continued to provide extensive fiscal and monetary support. As the pandemic spread, many policymakers worked quickly to cut interest rates, expand or extend central bank asset-purchase programs, pass fiscal stimulus packages, and provide relief to workers through enhanced unemployment benefits and job retention programs. Those efforts generally helped bring unemployment rates down and unleash pent-up consumer demand once the global economy began to reopen.

The investment environment became more challenging toward the end of the period. Ongoing supply disruptions and labor shortages in some sectors began to suggest that the rise in inflation might not be as transitory as many had hoped, leading to an increase in inflation expectations. On the policy front, a number of developed-market central banks signaled that they might soon start scaling back their bond-buying programs or raising rates, which many developing countries have already started to do.

During the last year, yields of both Treasuries and municipals rose. However, municipals outperformed as tax-exempt high-grade bond yields rose less, tightening up municipal?Treasury ratios. Additionally, we saw credit spreads tighten on medium- and lower-quality credits.

The credit profile of the muni market remained solid throughout the pandemic,

October 31, 2020

0.20% 0.34 0.94 1.79

October 31, 2021

0.23% 0.64 1.22 1.77

partly because many issuers were in a solid financial position before it hit--about two-thirds of the market was made up of bonds rated AA and above. The impact of the pandemic on revenues proved less negative than had been feared, with income tax and sales tax receipts holding up fairly well.

Additional support for munis came from government stimulus measures, which included $350 billion for state and municipal governments in May 2021 as part of the American Rescue Plan. That strengthened the credit profiles of some already high-quality issuers and helped stabilize those of lower quality.

Solid fundamentals, along with strong investor demand for tax-exempt income, contributed to the muni market returning 2.64% for the fiscal year, according to the Bloomberg Municipal Bond Index.

Management of the funds With the economy continuing to recover, muni fundamentals generally holding up well or improving, interest rates remaining low, and spreads compressing, we positioned the funds with a tilt toward credit. That took the form of larger-than-typical allocations to states with some challenges, such as underfunded pension plans and less scope to increase taxes, and they proved to be some of the best performers. For example, Illinois returned 6.74% and New Jersey 5.55% for the 12 months, according to the Bloomberg Municipal Bond Index.

We also had more exposure to BBB-rated bonds in the investment-grade funds (they returned 7.40% as a whole according to the same index) and favored lower-quality subsectors such as hospitals over higher-quality ones such as water, sewer, and electric.

Toward the end of the period, we reduced our positions in those riskier segments as valuations retraced, but we still see some select opportunities in the mid-quality

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range of investment-grade securities given the supportive policies and federal aid directed at the muni market.

For the shorter-term funds, we strategically reduced our interest rate exposure as the front end of the municipal curve got richer compared with Treasury yields. We continued to maintain an overweight to lower-quality credits to produce excess returns given the improving fundamental backdrop. The funds will look to deploy excess cash into the market when valuations normalize and rates adjust higher.

Overall, we kept the durations of the funds fairly close to neutral, although we did shorten them for the intermediate- and long-term funds around February in anticipation of rates rising as the economic rebound intensified in the spring.

Outlook The rapid rebound in economic activity we've seen from COVID-19 lows is likely to give way to slower growth for major economies. In the U.S., we expect growth to normalize lower, to 4% in 2022.

The recent upswing in inflation could prove to be less transitory than currently expected. The combination of higher demand caused by pandemic restrictions

being lifted and lower supply due to labor and input shortages globally has pushed consumer prices higher in much of the world. While a return to 1970s-style inflation is not in the cards, we anticipate supply-demand frictions to persist well into 2022 and keep inflation elevated in developed and emerging markets.

Health outcomes will remain important for the economy, but the outlook for macroeconomic policy will also be crucial as support and stimulus packages enacted to combat the pandemic-driven downturn are gradually removed into 2022.

Central bankers will have to strike a delicate balance between keeping a lid on inflation expectations amid negative supply-side shocks and supporting a return to pre-COVID employment levels. In the United States, that balance should involve the Federal Reserve raising rates in 2022 to ensure that elevated wage inflation does not translate into more permanent core inflation. At present, we see the risks of too-easy policy accommodation outweighing the risks of modestly raising short-term rates in light of the conditions in the labor and financial markets.

We expect the muni market to be driven largely by Federal Reserve policy and Treasury rates in the near term. Within

munis, expansive fiscal support has made some issuers stronger, while others have papered over existing issues. We'll aim to reflect that distinction in our positioning. As muni valuations are currently rich, we will look for opportunities to add credit exposure when and as it becomes more attractively priced.

Whatever the markets may bring, our experienced team of portfolio managers, traders, and credit analysts will continue to navigate this large, fragmented market to seek attractive investment opportunities that will add to the funds' performance.

Paul M. Malloy, CFA, Principal, Head of Municipal Bond Group

James D'Arcy, CFA, Portfolio Manager

Adam M. Ferguson, CFA, Portfolio Manager

Mathew M. Kiselak, Principal, Portfolio Manager, Head of Municipal Bond Desk

Justin A. Schwartz, CFA, Portfolio Manager, Head of Municipal Money Market Funds

Vanguard Fixed Income Group

November 12, 2021

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About Your Fund's Expenses

As a shareholder of the fund, you incur ongoing costs, which include costs for portfolio management, administrative services, and shareholder reports (like this one), among others. Operating expenses, which are deducted from a fund's gross income, directly reduce the investment return of the fund. A fund's expenses are expressed as a percentage of its average net assets. This figure is known as the expense ratio. The following examples are intended to help you understand the ongoing costs (in dollars) of investing in your fund and to compare these costs with those of other mutual funds. The examples are based on an investment of $1,000 made at the beginning of the period shown and held for the entire period. The accompanying table illustrates your fund's costs in two ways: ? Based on actual fund return. This section helps you to estimate the actual expenses that you paid over the period. The "Ending Account Value" shown is derived from the fund`s actual return, and the third column shows the dollar amount that would have been paid by an investor who started with $1,000 in the fund. You may use the information here, together with the amount you invested, to estimate the expenses that you paid over the period. To do so, simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number given for your fund under the heading "Expenses Paid During Period." ? Based on hypothetical 5% yearly return. This section is intended to help you compare your fund`s costs with those of other mutual funds. It assumes that the fund had a yearly return of 5% before expenses, but that the expense ratio is unchanged. In this case--because the return used is not the fund's actual return--the results do not apply to your investment. The example is useful in making comparisons because the Securities and Exchange Commission requires all mutual funds to calculate expenses based on a 5% return. You can assess your fund's costs by comparing this hypothetical example with the hypothetical examples that appear in shareholder reports of other funds. Note that the expenses shown in the table are meant to highlight and help you compare ongoing costs only and do not reflect transaction costs incurred by the fund for buying and selling securities. Further, the expenses do not include any purchase, redemption, or account service fees described in the fund prospectus. If such fees were applied to your account, your costs would be higher. Your fund does not carry a "sales load." The calculations assume no shares were bought or sold during the period. Your actual costs may have been higher or lower, depending on the amount of your investment and the timing of any purchases or redemptions. You can find more information about the fund's expenses, including annual expense ratios, in the Financial Statements section of this report. For additional information on operating expenses and other shareholder costs, please refer to your fund's current prospectus.

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Six Months Ended October 31, 2021

Beginning Account Value

4/30/2021

Ending Account Value

10/31/2021

Expenses Paid During

Period

Based on Actual Fund Return

Short-Term Tax-Exempt Fund

Investor Shares

$1,000.00

$ 999.70

$0.86

AdmiralTM Shares

1,000.00

1,000.10

0.45

Limited-Term Tax-Exempt Fund

Investor Shares

$1,000.00

$ 999.50

$0.86

Admiral Shares

1,000.00

999.90

0.45

Intermediate-Term Tax-Exempt Fund

Investor Shares

$1,000.00

$ 999.90

$0.86

Admiral Shares

1,000.00

1,000.30

0.45

Long-Term Tax-Exempt Fund

Investor Shares

$1,000.00

$1,003.50

$0.86

Admiral Shares

1,000.00

1,003.90

0.45

High-Yield Tax-Exempt Fund

Investor Shares

$1,000.00

$1,009.00

$0.86

Admiral Shares

1,000.00

1,009.40

0.46

Based on Hypothetical 5% Yearly Return

Short-Term Tax-Exempt Fund

Investor Shares

$1,000.00

$1,024.35

$0.87

Admiral Shares

1,000.00

1,024.75

0.46

Limited-Term Tax-Exempt Fund

Investor Shares

$1,000.00

$1,024.35

$0.87

Admiral Shares

1,000.00

1,024.75

0.46

Intermediate-Term Tax-Exempt Fund

Investor Shares

$1,000.00

$1,024.35

$0.87

Admiral Shares

1,000.00

1,024.75

0.46

Long-Term Tax-Exempt Fund

Investor Shares

$1,000.00

$1,024.35

$0.87

Admiral Shares

1,000.00

1,024.75

0.46

High-Yield Tax-Exempt Fund

Investor Shares

$1,000.00

$1,024.35

$0.87

Admiral Shares

1,000.00

1,024.75

0.46

The calculations are based on expenses incurred in the most recent six-month period. The funds' annualized six-month expense ratios for that period are: for the Short-Term Tax-Exempt Fund, 0.17% for Investor Shares and 0.09% for Admiral Shares; for the Limited-Term Tax-Exempt Fund, 0.17% for Investor Shares and 0.09% for Admiral Shares; for the Intermediate-Term Tax-Exempt Fund, 0.17% for Investor Shares and 0.09% for Admiral Shares; for the Long-Term Tax-Exempt Fund, 0.17% for Investor Shares and 0.09% for Admiral Shares; and for the High-Yield Tax-Exempt Fund, 0.17% for Investor Shares and 0.09% for Admiral Shares. The dollar amounts shown as "Expenses Paid are equal to the annualized expense ratio multiplied by the average account value over the period, multiplied by the number of days in the most recent six-month period, then divided by the number of days in the most recent 12-month period (184/365).

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Short-Term Tax-Exempt Fund Performance Summary

All of the returns in this report represent past performance, which is not a guarantee of future results that may be achieved by the fund. (Current performance may be lower or higher than the performance data cited. For performance data current to the most recent month-end, visit our website at performance.) Note, too, that both investment returns and principal value can fluctuate widely, so an investor's shares, when sold, could be worth more or less than their original cost. The returns shown do not reflect taxes that a shareholder would pay on fund distributions or on the sale of fund shares.

Cumulative Performance: October 31, 2011, Through October 31, 2021 Initial Investment of $10,000

$18,000

2012

2013

2014

2015

2016

2017

2018

2019

2020

11,063

2021

7,000

Short-Term Tax-Exempt Fund Investor Shares Bloomberg 1 Year Municipal Bond Index Bloomberg Municipal Bond Index

Average Annual Total Returns Periods Ended October 31, 2021

One Year

0.41%

0.50

2.64

Five Years

1.31%

1.38

3.41

Ten Years

1.01%

1.05

3.88

Final Value of a $10,000

Investment

$11,063

11,104

14,627

Short-Term Tax-Exempt Fund Admiral Shares

Bloomberg 1 Year Municipal Bond Index

Bloomberg Municipal Bond Index

One Year

0.49% 0.50 2.64

Five Years

1.40% 1.38 3.41

Ten Years

1.10% 1.05 3.88

Final Value of a $50,000

Investment

$55,779 55,518 73,136

See Financial Highlights for dividend and capital gains information. 6

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