Putnam Fixed Income Outlook Q4 2013
Upcoming SlideShare
Loading in...5
×
 

Putnam Fixed Income Outlook Q4 2013

on

  • 322 views

The Fed’s surprise September decision not to taper its bond buying program complicates the development and reliability of consensus policy expectations. We believe the current decline in labor ...

The Fed’s surprise September decision not to taper its bond buying program complicates the development and reliability of consensus policy expectations. We believe the current decline in labor participation may be more structural than cyclical, which could lead to rapid policy tightening at some point in 2014. We believe longer duration-oriented indexes, and fixed income approaches that align closely with them, present inordinately high risks to investors in the current environment.

Statistics

Views

Total Views
322
Views on SlideShare
322
Embed Views
0

Actions

Likes
0
Downloads
1
Comments
0

0 Embeds 0

No embeds

Accessibility

Upload Details

Uploaded via as Adobe PDF

Usage Rights

© All Rights Reserved

Report content

Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
  • Full Name Full Name Comment goes here.
    Are you sure you want to
    Your message goes here
    Processing…
Post Comment
Edit your comment

Putnam Fixed Income Outlook Q4 2013 Putnam Fixed Income Outlook Q4 2013 Document Transcript

  • Q4 2013 » Putnam Perspectives Fixed-Income Outlook Tapering on hold, but rate volatility here to stay Key takeaways • The Fed’s surprise September decision not to taper its bondbuying program complicates the development and reliability of consensus policy expectations. • We believe the current decline in labor participation may be more structural than cyclical, which could lead to rapid policy tightening at some point in 2014. l U.S. tax exempt l Tax-exempt high yield Agency mortgage-backed securities Overweight U.S. government and agency debt Neutral Fixed-income asset class Underweight Arrows in the table indicate the change from the previous quarter. Small overweight Putnam’s outlook Small underweight • We believe longer duration-oriented indexes, and fixedincome approaches that align closely with them, present inordinately high risks to investors in the current environment. l l Collateralized mortgage obligations l Non-agency residential mortgage-backed securities l Commercial mortgage-backed securities l U.S. floating-rate bank loans l U.S. investment-grade corporates l Global high yield l Emerging markets l U.K. government Core Europe government l l Peripheral Europe government Japan government CURRENCY SNAPSHOT Dollar vs. yen: Neutral Dollar vs. euro: Euro Dollar vs. pound: Neutral l l While we thought the beginning of the end of quantitative easing (QE) was coming into focus in June, by mid September we witnessed its temporary retreat. Despite widely shared expectations that the Fed would announce a $10 billion to $15 billion cut to its $85 billion monthly bond-buying program — otherwise known as “tapering” — the Fed surprised markets by maintaining purchases at current levels. While the Fed’s September meeting press release claims an expectation for “ongoing improvement in the labor market,” the Fed also stated it must “await more evidence that progress will be sustained,” and again reminded the public that the central bank’s highly accommodative monetary policies would remain “contingent on the Committee’s economic outlook.” It also appears that the decision not to taper was partly due to concerns about political discord in Washington. The bond market absorbed the Fed’s September opinion by staging a rally in rates and risk assets late in the third quarter. Shortterm rates, it appears, may be kept lower for longer. Purchases in mortgage markets are not stopping or being curtailed just yet, which should continue to provide downward pressure on long-term rates. But all of this could change if the data move the Fed to act otherwise.
  • Q4 2013 | Fixed-Income Outlook Misreading labor participation a rising problem for policymakers Importantly, the unemployment threshold of 6.5% — the point at which the Fed has suggested it could begin raising the federal funds rate — is not the only factor that would influence a rate change. “Additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments” could also play critical roles in determining the course of future Fed policy. The Fed and market observers, of course, may read the data differently, which makes it doubly hard to know when and how quickly policy may change. However, we believe the Fed may be reading U.S. employment data in such a way that it will be inclined to keep policy highly accommodative for longer. This is unlikely to change with the installation of Janet Yellen, a key architect of the central bank’s asset-purchasing program, as the new Fed Chair in 2014 pending Congressional approval. With its emphasis on contingency, the Fed has destabilized the market’s ability to form consensus policy expectations and turned the market back on what the data can tell us about how the economy is doing. In our view, this makes for a continuing regime of rate volatility driven by real-time economic releases. However, we read the data a bit differently. In particular, we read the data on labor participation — which is intimately tied to the unemployment rate and GDP growth — as the potential catalyst for a wageinflation surprise that could lead to a rapid tightening of policy ahead of the Fed’s current guidance. Fixed-income assets generally rebounded from second-quarter weakness. Figure 1:  ixed-income asset F class performance 2% 2Q 13 3Q 13 1% 0% -1% -2% -3% -4% -5% -6% U.S. government U.S. tax exempt Taxexempt high yield Agency Commercial U.S. U.S. mortgage- mortgage- floating- investmentbacked backed rate grade securities securities bank loans corporate debt Global high yield Emergingmarket debt U.K. gov’t Source: Putnam research, as of 9/30/13. Past performance is not indicative of future results. See page 10 for index definitions. 2 Eurozone gov’t Japan gov’t
  • PUTNAM INVESTMENTS | putnam.com If the drop in labor participation is structural rather than cyclical, then the Fed may have to raise rates a lot sooner — sooner than the Fed itself may currently expect. Labor participation: cyclical factors Policy may tighten more rapidly than expected At the moment, labor participation is in decline. In an economic downturn, labor force participation typically drops, primarily for two reasons. The first is that young people react to the weakness of the labor market by continuing their education or earning extra qualifications. The second is the “discouraged” worker effect; people try to find work, but find they are unable to get a job and then stop looking. The Fed understands the current decline in labor participation as a largely cyclical phenomenon. Some members of the Fed believe that the normal relationships apply — that the current drop in participation is cyclical, and once the economy gathers momentum, we will achieve a “normal” pattern of rapid job creation, but only slight declines in unemployment. On this “typical-cycle” view, the Fed could keep monetary policy easy for an extended period, since growth with high unemployment means there will be no upward pressure on wages, which generally could imply a lack of inflationary pressure. In a typical cycle of downturn followed by recovery, both of these effects tend to reverse themselves in short order. The young people finish their education and pick up with their job search, while the “discouraged” workers find encouragement from the new availability of jobs and start looking again as well. This helps explain why the measured unemployment rate does not fall very fast during a typical upturn: as jobs are created, people seek to rejoin the labor force. On the other hand, if the drop in participation is structural rather than cyclical, then the Fed may have to raise rates a lot sooner — sooner than the Fed itself may currently expect. When the economy picks up speed, unemployment could fall faster and the labor market would tighten, threatening upward pressure on wages. This is not a critical concern for interest rates in the next six months because unemployment remains relatively high. But it could matter a lot at some point in 2014. What is the correct ratio of cyclical to structural factors in labor participation? The data have yet to tell a clear story. But a big cyclical component to participation would help keep shortterm rates low, while a small cyclical component would mean an earlier jump in rates, as it could force the Fed to act sooner in order to counteract inflation pressures. Labor participation: structural factors The longer a recession goes on, however, the weaker this reversal and the more “structural” the decline in labor participation can become. In part, this is due to the aging of the “discouraged” out-of-work population, and because the longer people are out of work, the more their skills atrophy and the more they become accustomed to their new lifestyle. Two additional structural factors affecting labor participation in the United States in the current cycle are the decline of women in the workforce and the mounting numbers of retiring Baby Boomers. From 1950 to the mid 1990s, female labor participation rose steadily. From an economic perspective, this produced a labor participation growth rate that exceeded the population growth rate. Eventually, this factor plateaued, and subsequently has been falling slowly for well over a decade. As for the Baby Boomers, their aggregate move into retirement will naturally cause the growth of the labor force to slow. The financial crisis hit savings hard, and so a greater proportion of older workers has continued working. Nevertheless, participation rates inevitably tend to drop as people pass their mid 50s. Fundamental and policy tailwinds for securitized sectors Mortgage interest rates have risen by approximately 100 basis points year to date through September. Looking at the balance of data, the Fed found these rates too high and the dampening effect on home affordability too large, expressing this opinion in the decision not to taper. Nevertheless, housing data in terms of starts, construction permits, and price appreciation are still telling a positive story, in our view. We believe this growth will continue, and that the Fed’s policy support for lower rates and mortgage-buying activity will translate into additional strength in this area. Consequently, our mortgage-related investment strategies remain relatively unchanged. 3
  • Q4 2013 | Fixed-Income Outlook Figure 2. Rates moved higher as the Fed  discussed winding down its bond-buying programs Policy uncertainty could keep rate volatility elevated in the months ahead. 3% 9/30/13 6/30/13 2% 1% s ye ar 30 ye 10 ye 7 ar s s ar s 5 ye ar s ar ye 3 1m o 1   nth ye ar 0% Source: U.S. Department of the Treasury, as of 9/30/13. Interest-only collateralized mortgage obligations (IO CMOs), which performed well in the third quarter, remain attractive to us. As interest rates rose in recent months, the likelihood that the mortgages underlying CMOs would be refinanced declined, helping to boost these securities’ value. We do not see a drastic decline in rates in the months ahead and thus do not expect prepayment risk to increase. Securitized markets, which include non-agency RMBS, CMOs, and CMBS, depend on brokers to facilitate transactions between buyers and sellers. Although the United States has implemented a number of regulatory reforms that bear directly on these brokers’ business, there is still a fair amount of uncertainty over how much capital brokers will need to hold against securitized positions in the future. For this reason, brokers are still tentative about some trading and positioning, which translates into a liquidity premium in the price of many securitized bonds. Coupled with the Fed’s plans to maintain their quantitative easing programs for the time being, we think this factor will continue to enhance the attractiveness of the sector in the months ahead. Mortgage credit holdings — most notably, commercial mortgage-backed securities (CMBS) — delivered modestly positive performance, aided by stable-to-rising commercial property values. Within CMBS, select areas in “mezzanine” bonds rated BBB/Baa, which offered higher yields at what we believed were acceptable risks, also performed well on a relative basis. Currently, we favor higher-tier securitized bonds in the non-agency residential mortgage-backed securities (non-agency RMBS) market, and we continue to steer clear of the more damaged areas of the subprime market. 4
  • PUTNAM INVESTMENTS | putnam.com High-yield strength against a backdrop of modest economic recovery A pickup in merger and acquisition activity also proved to be a tailwind for the high-yield sector. During the third quarter, there were a number of acquisitions in which high-yield companies were merged into companies with higher credit ratings. Historically, when capital market conditions are favorable and there has been a long period of cost-cutting and productivity enhancements by larger U.S. companies, these companies have sought to add product lines, markets, and/or scale. Frequently, they will acquire smaller companies to accomplish those goals. As interest rates leveled out in the third quarter, high-yield bonds performed well and outpaced floating-rate bank-loan securities. In addition, high-yield market technicals improved, as flows into the asset class returned to positive territory. Spreads compressed but in many cases remained close to their historical averages. 1000 Figure 3. Current spreads relative to historical norms 1000 A n  verage excess yield over Treasuries (OAS, 1/1/98–12/31/07) 800 800 C n  urrent excess yield over Treasuries (OAS as of 9/30/13) 725 725 600 600 700 700 573 573 506 506 425 425 400 400 330 330 200 200 130130 0 0 34 34 41 41 Agencies Agencies 56 56 4343 141 141 89 89 123 123 123123 Agency Agency Investment-grade AAA CMBS Investment-grade AAA CMBS MBS MBS corporates corporates High yield High yield 200 200 Non-agency Non-agency  RMBS  RMBS 150  200 150  200 Agency IO IO Agency EMD EMD Sources: Barclays, Putnam, as of 9/30/13. Data are provided for informational use only. Past performance is no guarantee of future results. All spreads are in basis points and measure optionadjusted yield spread relative to comparable maturity U.S. Treasuries with the exception of non-agency RMBS, which are loss-adjusted spreads to swaps calculated using Putnam’s projected assumptions on defaults and severities, and agency IO, which is calculated using assumptions derived from Putnam’s proprietary prepayment model. Agencies are represented by Barclays U.S. Agency Index. Agency MBS are represented by Barclays U.S. Mortgage Backed Securities Index. Investment-grade corporates are represented by Barclays U.S. Corporate Index. High yield is represented by Barclays U.S. Corporate High Yield Index. AAA CMBS are represented by the Aaa portion of Barclays Investment Grade CMBS Index. EMD is represented by Barclays Global Emerging Markets Index. Non-agency is estimated using average market level of a sample of below-investment-grade securities backed by Alt-A collateral. Agency IO is estimated from a basket of Putnam-monitored interest-only securities. Option-adjusted spread (OAS) measures the yield spread over duration equivalent Treasuries for securities with different embedded options. 5
  • Q4 2013 | Fixed-Income Outlook Bond returns gained ground versus Treasuries amid central bank policy uncertainty and political wrangling. Figure 4. Spread sectors’ excess  returns relative to Treasuries 0.8% 0.6% 0.4% 0.2% 0.0% -0.2% CMBS Corporates MBS U.S. agency ABS Source: Barclays, as of 9/30/13. Past performance is not indicative of future results. In light of stronger balance sheets and ample cash reserves, investment-grade companies have become more comfortable taking on slightly more debt, while seeking higher returns on their invested capital. Typically, our high-yield portfolios can benefit from mergers or acquisitions in one of two ways. The restrictive covenants governing high-yield bonds often will prompt the acquiring company to redeem the target company’s outstanding bonds. Alternatively, if the outstanding bonds are not redeemed, the prices of the target company’s bonds will rise as their yields move lower to more closely align with the yields on bonds issued by the higher-rated acquirer. Looking forward, the fundamental backdrop for highyield bonds remains solid, in our view. High-yield issuers are in reasonably good financial shape, and the default rate remains near historically low levels. The U.S. economy continues to grow, albeit slowly; Europe appears to be emerging from recession; and growth in Asia is improving. Our overall outlook is positive, because, historically, highyield bonds have done well during periods of moderate economic growth. When interest rates were lower and credit spreads were tighter, a significant proportion of high-yield bonds were trading at premium prices, meaning above their par value. Because high-yield bonds can generally be called away by the issuer prior to their maturity dates, the market was effectively stuck at higher prices without providing much call protection. While the asymmetry of the highyield market has improved somewhat, the market does offer better total return potential. From a fundamental point of view, we see underlying strength in the economy and among corporates. 6
  • PUTNAM INVESTMENTS | putnam.com Investment-grade credit: continued strength assets negatively, including corporate credit. However, when rising rates are associated with an economic recovery, it bodes well for corporate spreads; consequently, we believe spreads will begin to tighten as the year comes to a close and into 2014. During the third quarter, we continued to see strong fundamentals among investment-grade bond issuers. Profit margins are high, and balance sheets are in good shape. In addition, where companies are becoming increasingly leveraged, they are generally issuing debt at low cost with long-dated maturities. Although investment-grade credit has rallied significantly since the 2008 financial crisis, spreads remain wide versus historical averages, and we see the sector as offering further potential for investors to benefit from narrowing spreads. From a sector perspective, securities issued by financial institutions, particularly large, money center banks, were among the best performers in the third quarter. Regulation has continued to transform the banking industry by limiting risky activities and increasing capital requirements, which has resulted in a sustained improvement in credit spreads. Rate volatility may not derail credit opportunities We also favor stable cash flow generators like utilities, as well as cable and media companies. Higher rate volatility, which markets have been grappling with since the second quarter, affects all fixed-income Figure 5.  igh-yield spreads and defaults generally H move in tandem over credit cycles High-yield default rate Spread to worst Current spread: 506 bps (as of 9/30/13) 20-year median spread: 538 bps Average default rate: 4.3% Default rate 1990–91 recession 2000 1600 2001 recession 1200 800 8 400 4 0 0 ’87 ’88 ’89 ’90 ’91 ’92 ’93 ’94 ’95 ’96 ’97 ’98 ’99 ’00 ’01 ’02 ’03 ’04 ’05 ’06 ’07 ’08 ’09 ’10 ’11 ’12 9/30/13 Sources: JPMorgan, High Yield Market Monitor, 9/30/13. A basis point (bp) is one-hundredth of a percent. One hundred basis points equals one percent. Spread to worst measures the difference between the best- and worst-performing yields in two asset classes. 7 Spreads (bps) 12 Today, the gap between spreads and defaults remains wide, signaling opportunity for investors 2007–09 recession 20 16 Spreads have come in from all-time highs; defaults remain low.
  • Q4 2013 | Fixed-Income Outlook Global bonds: developed-market strength, emerging-market weakness issues have been exposed that may prove to be obstacles for this asset class. Those countries that apparently did not use the recent era of global quantitative easing to improve their fiscal policies now appear to have relatively poor fundamentals and are faced with a negative environment for raising additional capital. The global macroeconomic environment, though less solid than the United States, appears to be stabilizing. This is particularly the case in Europe, which we see emerging from its recession, and in Japan, which is pursuing an aggressive policy agenda to weaken the yen and pull the economy out of a multi-decade period of deflation. China, too, reported positive manufacturing data above economists’ expectations late in the third quarter, which suggests China is registering some success in avoiding the “hard landing” that might otherwise have a more disruptive effect on global markets. A continued widening of emerging-market debt spreads could potentially lead to sustained weakness in emergingmarket currencies. However, we do not see the present enacting a repeat of past emerging-market crises — such as the Asian currency crisis of 1998. Since that period, a variety of developing countries have developed local debt markets and enhanced their domestic growth profile. Yet, for all this greater diversification of underlying economic activity, we believe emerging -market debt will face challenging conditions in the near term. Emerging debt markets may continue to struggle In emerging markets more generally, the Fed tapering discussion caused debt to sell off late in the second quarter of 2013, and outflows from this sector continued through the third quarter. As that has happened, other The most attractive relative values appear to be in the BBB-rated segment of the muni market. Figure 6:  unicipal bond credit spreads M have narrowed from historical wides Municipal bond spreads by quality rating AA A BBB 500 400 300 200 100 0 1999 2000 2001 2002 2003 2004 2005 2006 Sources: Putnam, as of 9/30/13. Credit ratings are as determined by Putnam. 8 2007 2008 2009 2010 2011 2012 9/30/13
  • PUTNAM INVESTMENTS | putnam.com The last-minute deal on the debt ceiling kept the government from a technical default; however, the temporary nature of the agreement has potentially severe implications for asset markets. Municipal bonds: finding opportunities amid volatile conditions occasional isolated incidents, as in the case of Detroit’s bankruptcy filing in July and heightened concern over Puerto Rico credit profile more recently. The debate over the pace of tapering and eventual withdrawal of the Federal Reserve’s QE program contributed to a challenging environment for municipal bonds in the third quarter. Rates climbed during July and August before rallying in September. Overall, the municipal bond yield curve steepened. The upward trend in rates depressed performance, as bond prices move in the opposite direction of rates. Given the improvement in state budget forecasts, Moody’s revised its outlook for U.S. states in August to stable after five years of issuing negative ratings. Credit quality at the state level remains quite high, with 30 of the 50 states holding either an Aaa or Aa1 rating, the two highest possible ratings. On balance, we think the outlook is becoming increasingly stable, given the general improvement in employment, economic growth, and consumer confidence — all of which have contributed to rising tax collections. Technical pressures were also a headwind for much of the third quarter. Faced with the prospect of higher interest rates, many retail investors sold their municipal bond investments. Detroit’s bankruptcy and Puerto Rico’s debt challenges also created headline risk and added to investor fears. However, in September, the technical backdrop improved somewhat. Municipal bond prices rallied as demand from price-conscious retail and crossover-buyers picked up, and outflows from municipal bond funds slowed. In addition, there has been a significant reduction in refunding activity across the municipal bond market. After the Fed surprised many observers by deciding not to begin tapering in September, municipal bond prices generally rallied. Our municipal positioning emphasizes higher tiers of lower-rated bonds The third quarter proved to be a volatile time for municipal bonds, and market conditions remain less than robust. However, we identified what we considered improving fundamentals and still attractive spreads in the market and sought to benefit from them. Generally speaking, essential service revenue bonds are faring well, and we have maintained our overweight position in revenue bonds rated BBB. We continue to have a constructive outlook for municipal bonds, especially as part of a diversified portfolio and for long-term investors seeking tax-free income. The third quarter proved to be a very volatile time for municipal bonds, and market conditions remain less than robust. It is worth noting that while spreads are much narrower than they were at their peak, we believe the recent sell-off has created more attractive opportunities in a dislocated municipal market. Periods of high volatility, although unpleasant for investors, can offer attractive buying opportunities. Taxexempt yields are more attractive now given the sharp rise in rates, in our opinion. In fact, we have not seen yields at this level since 2011. We think our fundamental research will be the key to unlocking these opportunities and providing return potential because the municipal market is exceptionally diverse, composed of small issuers, complex instruments, and an array of market participants with varying return objectives. We believe this market dynamic presents inefficiencies that can make attractive investment opportunities. In currency markets, the dollar appears less robust We are taking relatively less risk in active currency strategies, as the Fed’s decision not to taper its stimulative bond-buying program and the shutdown of the U.S. government have created an environment with fewer opportunities, in our view. The last-minute deal on the debt ceiling kept the government from a technical default; however, the temporary nature of the agreement has potentially severe implications for asset markets. In these conditions, we have a neutral view toward the U.S. dollar. Municipal defaults have remained near historical averages For calendar year 2012, bankruptcy filings represented approximately 0.12% of the $3.7 trillion municipal bond market, and they have remained near this rate so far in 2013 as well. This default rate is in line with historical averages, and we do not believe defaults will increase meaningfully in the near future. Having said that, we do expect to see the ongoing risk that emerges from 9
  • Q4 2013 | Fixed-Income Outlook Fed’s surprise decision signals caution, but not a reversal in outlook We favor a slight overweight to the euro as cyclical economic growth is improving and the European Central Bank (ECB) policy remains accommodative. The Fed’s decision to maintain asset purchases has given the ECB time by helping to lower the global term premia, relieving pressure on European short-term interest rates, and reducing the need for more dovish rhetoric. At the same time, we are less negative on the British pound sterling as U.K. economic growth data remain strong, and are challenging the forward guidance as laid out by the Bank of England. Fed officials now appear more concerned about the hints of softness in the recent economic results, such as retail sales and the specter of rising mortgage rates over otherwise positive housing data, and are less impressed with the strong data elsewhere in the U.S. economy. We also think the central bank may be more worried about fiscal issues at the federal level than the financial markets appear to be, given recent market performance. From a medium-term perspective, the desire among policymakers and investors alike is for the financial markets to return to a more normalized environment. Consequently, the Fed would prefer to transition from aggressively providing liquidity to the markets to letting the markets function on their own again. But, as the Fed showed markets in September, it can still surprise, and may continue to do so if economic data signal a reversal of fortunes for the U.S. recovery. When the Fed eventually does taper and as rates remain elevated or resume their upward trend, we think the markets will react with more volatility. Overall, however, we believe investors may navigate the beginning of the coming transition fairly well, and we think risk-seeking behavior will continue to be active in both the credit and stock markets. Our view on the Japanese yen has become more neutral. Over the medium term, it is expected that the Bank of Japan will have to do much more monetary easing than currently slated, which should provide further impetus for the dollar to rally versus the yen. We also believe the yen and Japanese stocks may be more aligned than was the case earlier this year. Elsewhere, we now favor a slight overweight to the Australian dollar and an underweight to the Canadian dollar. In emerging markets, we favor a relative value positioning. The surprise by the Fed and the probability that Janet Yellen will be confirmed as Fed Chairman increases the chance of much more benign changes to U.S. monetary policy, but large structural long positions in local emerging debt markets remain in place for many investors, which leaves some emerging-market currencies more susceptible to capital outflows, we believe. Agency mortgage-backed securities are represented by the Barclays U.S. Mortgage Backed Securities Index, which covers agency mortgage-backed pass-through securities (both fixed-rate and hybrid ARM) issued by Ginnie Mae (GNMA), Fannie Mae (FNMA), and Freddie Mac (FHLMC). Japan government is represented by the Barclays Japanese Aggregate Bond Index, a broad-based investment-grade benchmark consisting of fixed-rate Japanese yen-denominated securities. Tax-exempt high yield is represented by the Barclays Municipal Bond High Yield Index, which consists of below-investment-grade or unrated bonds with outstanding par values of at least $3 million and at least one year remaining until their maturity dates. Commercial mortgage-backed securities are represented by the Barclays U.S. CMBS Investment Grade Index, which measures the market of commercial mortgage-backed securities with a minimum deal size of $500 million. The two subcomponents of the U.S. CMBS Investment Grade Index are the U.S. aggregate-eligible securities and non-eligible securities. To be included in the U.S. Aggregate Index, the securities must meet the guidelines for ERISA eligibility. U.K. government is represented by the Barclays Sterling Aggregate Bond Index, which contains fixed-rate, investment-grade, sterling-denominated securities, including gilt and non-gilt bonds. Emerging-market debt is represented by the JPMorgan Emerging Markets Global Diversified Index, which is composed of U.S. dollar-denominated Brady bonds, eurobonds, traded loans, and local market debt instruments issued by sovereign and quasi-sovereign entities. U.S. floating-rate bank loans are represented by the S&P/LSTA Leveraged Loan Index, an unmanaged index of U.S. leveraged loans. U.S. government and agency debt is represented by the Barclays U.S. Aggregate Bond Index, an unmanaged index of U.S. investment-grade fixed-income securities. Eurozone government is represented by the Barclays European Aggregate Bond Index, which tracks fixed-rate, investment-grade securities issued in the following European currencies: euro, Norwegian krone, Danish krone, Swedish krona, Czech koruna, Hungarian forint, Polish zloty, and Swiss franc. U.S. investment-grade corporate debt is represented by the Barclays U.S. Corporate Index, a broad-based benchmark that measures the U.S. taxable investment-grade corporate bond market. U.S. tax exempt is represented by the Barclays Municipal Bond Index, an unmanaged index of long-term fixed-rate investment-grade tax-exempt bonds. Global high yield is represented by the BofA Merrill Lynch Global High Yield Constrained Index, an unmanaged index of global high-yield fixed-income securities. You cannot invest directly in an index. 10
  • PUTNAM INVESTMENTS | putnam.com This material is provided for limited purposes. It is not intended as an offer or solicitation for the purchase or sale of any financial instrument, or any Putnam product or strategy. References to specific securities, asset classes, and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations or investment advice. The opinions expressed in this article represent the current, good-faith views of the author(s) at the time of publication. The views are provided for informational purposes only and are subject to change. This material does not take into account any investor’s particular investment objectives, strategies, tax status, or investment horizon. The views and strategies described herein may not be suitable for all investors. Investors should consult a financial advisor for advice suited to their individual financial needs. Putnam Investments cannot guarantee the accuracy or completeness of any statements or data contained in the article. Predictions, opinions, and other information contained in this article are subject to change. Any forward-looking statements speak only as of the date they are made, and Putnam assumes no duty to update them. Forward-looking statements are subject to numerous assumptions, risks, and uncertainties. Actual results could differ materially from those anticipated. Past performance is not a guarantee of future results. As with any investment, there is a potential for profit as well as the possibility of loss. Putnam’s veteran fixed-income team offers a depth and breadth of insight Successful investing in today’s markets requires a broad-based approach, the flexibility to exploit a range of sectors and investment opportunities, and a keen understanding of the complex global interrelationships that drive the markets. That is why Putnam has more than 70 fixedincome professionals focusing on delivering comprehensive coverage of every aspect of the fixed-income markets, based not only on sector, but also on the broad sources of risk — and opportunities — most likely to drive returns. D. William Kohli Co-Head of Fixed Income Global Strategies Investing since 1987 Joined Putnam in 1994 Michael V. Salm Co-Head of Fixed Income Liquid Markets and Securitized Products Investing since 1989 Joined Putnam in 1997 The information provided relates to Putnam Investments and its affiliates, which include The Putnam Advisory Company, LLC and Putnam Investments Limited®. Prepared for use in Canada by Putnam Investments Inc. [Investissements Putnam Inc.] (o/a Putnam Management in Manitoba). Where permitted, advisory services are provided in Canada by Putnam Investments Inc. [Investissements Putnam Inc.] (o/a Putnam Management in Manitoba) and its affiliate, The Putnam Advisory Company, LLC. Paul D. Scanlon, CFA® Co-Head of Fixed Income Global Credit Investing since 1986 Joined Putnam in 1999 11
  • Consider these risks before investing: International investing involves certain risks, such as currency fluctuations, economic instability, and political developments. Additional risks may be associated with emerging-market securities, including illiquidity and volatility. Lower-rated bonds may offer higher yields in return for more risk. Funds that invest in government securities are not guaranteed. Mortgage-backed securities are subject to prepayment risk. Derivatives also involve the risk, in the case of many over-the-counter instruments, of the potential inability to terminate or sell derivatives positions and the potential failure of the other party to the instrument to meet its obligations. Bond investments are subject to interest-rate risk, which means the prices of the fund’s bond investments are likely to fall if interest rates rise. Bond investments also are subject to credit risk, which is the risk that the issuer of the bond may default on payment of interest or principal. Interest-rate risk is generally greater for longer-term bonds, and credit risk is generally greater for below-investment-grade bonds, which may be considered speculative. Unlike bonds, funds that invest in bonds have ongoing fees and expenses. You can lose money by investing in a mutual fund. If you are a U.S. retail investor, please request a prospectus, or a summary prospectus if available, from your financial representative or by calling Putnam at 1-800-225-1581. The prospectus includes investment objectives, risks, fees, expenses, and other information that you should read and consider carefully before investing. In the United States, mutual funds are distributed by Putnam Retail Management. PUTNAM INVESTMENTS | putnam.com CM0200 283528 10/13