Putnam Fixed Income Outlook Q1 2013
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Putnam Fixed Income Outlook Q1 2013

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• Spread sectors continued to rally as investors focused more on opportunities than on risks. ...

• Spread sectors continued to rally as investors focused more on opportunities than on risks.
• The Fed maintained its stance, but new questions emerged about how much further influence the central bank can exert.
• With tax rates fixed for the near term, policymakers turned their attention to spending cuts.
• Despite tighter valuations in corporate credit, we foresee continued solid demand and fundamentals.

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Putnam Fixed Income Outlook Q1 2013 Putnam Fixed Income Outlook Q1 2013 Document Transcript

  • Putnam’s outlookArrows in the table indicate the changefrom the previous quarter.UnderweightSmallunderweightNeutralSmalloverweightOverweightFixed-income asset classU.S. government and agency debt lU.S. tax exempt lTax-exempt high yield lAgency mortgage-backed securities lCollateralized mortgage obligations lNon-agency residentialmortgage-backed securitieslCommercial mortgage-backed securities lU.S. floating-rate bank loans lU.S. investment-grade corporates lGlobal high yield lEmerging markets lU.K. government lEurozone government lJapan government lCURRENCY SNAPSHOTDollar vs. yen: DollarDollar vs. euro: NeutralDollar vs. pound: DollarSpread sectors continued to rallyas investors focused more onopportunities rather than risksRisk assets in the first quarter continuedtheir momentum from the final weeks of2012, posting solid gains across a numberof markets and asset classes. This is not tosuggest it was an uneventful period: Januarybegan with a last-minute tax deal to raisefederal rates on top earners and avoid theacross-the-board hikes outlined in the fiscalcliff. In March, after political brinkmanshipfrom both sides of the aisle failed to resultin a deal, the automatic sequestration cutsbegan to take effect, representing a reductionin federal spending of $85 billion in 2013, orabout 2.2%.Political rhetoric aside, the generaleconomic consensus is that the reduction inspending will have a mild negative impact onGDP; our own estimates call for a negativeimpact of somewhere between 0.50% and0.75% in 2013. That said, our base-case fore-cast calls for continued GDP growth in 2013and marginal improvement over last year’s2.2% growth.Outside the United States, Europereclaimed headlines after Italy’s electionsfailed to produce a majority governmentand Cyprus’s banking system, teetering onthe brink of collapse, agreed to a substantialrestructuring and EU bailout. These eventswere generally understood to be negativedevelopments on the world stage, but webelieve the muted market reaction is telling.Key takeaways• Spread sectors continued to rally as investors focused moreon opportunities than on risks.• The Fed maintained its stance, but new questions emergedabout how much further influence the central bank can exert.• With tax rates fixed for the near term, policymakers turnedtheir attention to spending cuts.• Despite tighter valuations in corporate credit, we foreseecontinued solid demand and fundamentals.Fixed-Income OutlookApril 2013 » Putnam Perspectives
  • 2APRIL 2013 | Fixed-Income OutlookAs recently as a year ago, such developments wouldhave been much more likely to spark a widespread selloff,with a concurrent flight to U.S. Treasuries — a pattern thatmarkets experienced often during the past few years. Thefact that investors have remained more focused on longer-term opportunities rather than the short-term news cyclesuggests to us that they are much more attuned to thepotential opportunity costs of remaining on the sidelines.To that end, we’ve seen significant outflows from cashinvestments in recent months as investors moved backinto equities and continued to allocate to fixed-incomespread sectors, many of which have been experiencingsubstantial inflows for some time. We believe this typeof environment — one in which declining interest ratesare not the primary driver of returns and the risk-on/risk-off trade does not overshadow fundamentals in themarket — provides an abundance of opportunities foractive managers. We believe our holistic, bottom-upapproach to securities, sectors, rates, and currenciespositions Putnam well for the market environment thatwe now see unfolding.The Federal Reserve maintained itscommitment to easy money given a weak labormarket and benign inflation projectionsFollowing the March Federal Open Market Committee(FOMC) meeting, Chairman Ben Bernanke reaffirmedthe central bank’s commitment to easy money. Late lastyear, the Fed launched the much-anticipated “QE3” andreplaced the expiring “Operation Twist” in December withanother round of targeted Treasury purchases. In all, theFed is currently purchasing $85 billion a month in agencymortgage-backed securities and intermediate- and long-term Treasuries. Both sets of purchases are being madewith newly created money, so investors have been moremindful in recent months of the potential for higher infla-tion, which has to date been relatively benign.Figure 1: Risk assets continued rally to begin 2013-2%0%2%4%6%8%10%1Q 134Q 12Japangov’tEurozonegov’tU.K.gov’tEmerging-marketdebtGlobalhighyieldU.S.investment-gradecorporatedebtU.S.floating-ratebankloansCommercialmortgage-backedsecuritiesAgencymortgage-backedsecuritiesTax-exempthighyieldU.S.taxexemptU.S.governmentandagencydebtSource: Putnam research, as of 3/28/13. Past performance is not indicative of future results. See page 11 for index definitions.Japanese debt and highyield led the market, whileemerging-market andeurozone debt lagged.
  • PUTNAM INVESTMENTS | putnam.com3The Fed had also recently introduced specific bench-marks into its statements, indicating it would continue itscurrent policies as long as unemployment remains above6.5%, one- to two-year inflation projections remain nomore than a half percentage point above the 2% longer-run goal, and longer-term inflation expectations continueto be “well anchored.” While the most recent unemploy-ment reading registered at 7.7% — the lowest level in thepast four years — the Fed said it does not expect to reachits target rate until sometime in 2015.Nonetheless, since July 2012, when yields on thebenchmark 10-year Treasury fell to a low of 1.43%,rates have climbed steadily higher on the long end ofthe curve, hitting 2.07% for 10-year Treasuries in earlyMarch. In absolute terms, 60 basis points is a fairly smallmovement, but it is worth noting that it represents ajump of more than 40% from last year’s lows. To be sure,some of that movement is attributable to improvinginvestor sentiment about the health of the economy,particularly in 2013. In addition, the Fed’s easing policiesare by definition inflationary, although we believe therecent rate movements do not necessarily suggest aperception of higher levels of inflation over the near term,given the lack of concurrent movements in the Treasuryinflation-protected securities (TIPS) market. Rather, wetend to believe that some of the interest-rate volatilityof the past few months is more a product of investors’concern that the Fed’s ability to influence long-term rateswith purchase programs is beginning to wane. This worryhas been a staple of every QE program that the Fed hasunveiled, and while we do not share the concern that theFed may be “out of ammunition,” we certainly do notbelieve that interest-rate risk is attractively priced.To that end, we have sought to mitigate interest-ratevolatility in our portfolios for several quarters. As longas the Fed continues injecting liquidity into the financialsystem through targeted bond purchases, we do notbelieve that interest rates will climb significantly higherthan where they are today. We also believe a strategy thatrelies on rates declining further to drive performance is arecipe for trouble in this kind of a potentially range-boundand volatile interest-rate environment, and we continue toimplement a relative underweight position in interest-raterisk across our portfolios.Opportunities appear abundant in globalbond markets, but require a bottom-up,security-level approachOur outlook for international bond markets on the wholeremains largely unchanged from three months earlier.While there exist myriad opportunities for establishingpositions on the direction or magnitude of interest-ratemovements, on the shape and slope of the yield curve, oron currency exchange rates, we do not believe there aremany opportunities that suggest large, top-down, passiveallocations. This kind of market environment is one in whichwe believe Putnam’s skill set is particularly well suited.To that end, we have been pursuing targeted opportu-nities in Europe, including in both peripheral countries likeItaly, Spain, and Greece, and in the dominant economiesof France and Germany. This is not to say that we believeEurope is poised for a sharp rebound. As the recent devel-opments in Cyprus have illustrated, Europe continuesto muddle through its structural challenges. That said,investors’ fears over a possible collapse of the EuropeanMonetary Union or of a widespread contagion of thedeveloped-market financial system have largely abated.This renewed — and, in our view, justified — outlook forslow and steady progress in Europe has helped Spanishsovereign debt post gains over the first quarter whileyields in Italian debt were relatively stable. Putnamportfolios have been mostly tactical in their Europeanallocations, but the common theme generally has been toseek to establish positions in those areas that we believehave been oversold or unrealistically priced after themarket volatility of the past two years.While the Fed’s easing policies are, by definition, inflationary, we believe the recentrate movements do not suggest a perception of higher near-term inflation.
  • 4APRIL 2013 | Fixed-Income OutlookOur outlook for emerging-market debt in 2013, mean-while, also is largely unchanged. The fundamentals inmany emerging economies remain attractive, with solidhousing markets and financial sectors, as well as low debtloads in many countries. However, as we have discussedbefore, we believe the global economic environmenttoday is a less favorable one for developing markets tocompete in for capital. Emerging-market sovereign debtis much more reliant on foreign capital and today, withheightened volatility and uncertainty in the developedmarkets, we believe investors should be wary of howstable those flows into emerging markets are likely tobe. Spreads today — which reflect the yield advantageoffered by the asset class — are tighter than their historicalnorm, although we are cautious about how much stock toput in backward-looking comparisons when discussingemerging markets. Many emerging markets, while facing achallenging environment today, are clearly in much betterfinancial condition than they were 10–15 years ago, andthat fact alone may be enough to warrant tighter-than-normal spreads. Ultimately, we believe that today’s lessattractive valuations and uncertain macro environmentsuggest that investing in emerging-market debt requirescareful security-level analysis, and that a passive alloca-tion to the asset class remains a risky proposition.Figure 2. Interest rates crept higher on thelong end of the curve0%1%2%3%12/31/123/28/1330years20years10years7years5years3years1 year1monthSource: U.S. Department of the Treasury, as of 3/28/13.Given current Fed policy, long-terminterest rates could experiencevolatility over the foreseeable future.
  • PUTNAM INVESTMENTS | putnam.com5Figure 3. Current spreads relative to historical normsn Average excess yield over Treasuries(OAS, 1/1/98–12/31/07)n Current excess yield over Treasuries(OAS as of 3/28/13)Housing market continued to make gainsin Q1, signaling a possible increase in banks’willingness to lendSingle-family home prices continued to trend higher,which has arguably been the most encouraging piece ofmacroeconomic data in recent months. Based on first-quarter results, the Case-Shiller Index is on track for gainsin the low teens for 2013. And, of course, while we cannotguarantee performance, our own internal estimates callfor national housing gains in the mid-single digits for 2013and 2014. Under either scenario, the improvements arewelcome news in an economy still struggling with persis-tent high unemployment and a less-than-stable outlookfor consumer spending.While it is difficult to put a precise figure to the activity,a good portion of these gains has stemmed from newinvestors entering the market, including a number offinancial institutions and hedge funds, to turn formerprimary residences into rental properties. Rental yieldsin many markets are running at 10% or higher and, whencoupled with the potential gains from the appreciation ofthe property, many investors have found the combinationtoo attractive to pass up.Sources: Barclays, Putnam, as of 3/28/13.Data are provided for informational use only. Past performance is no guarantee of future results. All spreads are in basis points and measure option-adjusted yield spread relative to comparable maturity U.S. Treasuries with the exception of non-agency RMBS, which are loss-adjusted spreads toswaps calculated using Putnam’s projected assumptions on defaults and severities, and agency IO, which is calculated using assumptions derivedfrom Putnam’s proprietary prepayment model. Agencies are represented by Barclays U.S. Agency Index. Agency MBS are represented by BarclaysU.S. Mortgage Backed Securities Index. Investment-grade corporates are represented by Barclays U.S. Corporate Index. High yield is represented byBarclays U.S. Corporate High Yield Index. AAA CMBS are represented by the Aaa portion of Barclays Investment Grade CMBS Index. EMD is repre-sented by Barclays Global Emerging Markets Index. Non-agency is estimated using average market level of a sample of below-investment-gradesecurities 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.5613089511123150 42534 30600200400600450700350200287457115139EMDAgency IONon-agency RMBSHigh yieldAAA CMBSInvestment-gradecorporatesAgencyMBSAgencies5613089511123150 42534 30600200400600450700350200287457115139EMDAgency IONon-agency RMBSHigh yieldAAA CMBSInvestment-gradecorporatesAgencyMBSAgenciesSpreads across anumber of sectors aretoday in line with theirhistorical averages.
  • 6APRIL 2013 | Fixed-Income OutlookIn our multi-sector portfolios, we have continued toimplement our strategy of investing in both non-agencyresidential mortgage-backed securities (RMBS) andinterest-only agency collateralized mortgage obligations(CMO IOs). As we have discussed before, non-agencyRMBS tend to benefit from improving housing funda-mentals, which have been picking up throughout the pastyear, and have really begun to gather steam over the pastsix months. Agency CMO IOs, on the other hand, tend tobenefit in an environment where refinancing is challengingfor mortgage-holders, which has certainly been the casefor at least the past two years.With home prices improving across the country andbank lending standards beginning to loosen, however,we are taking a more neutral view on the agency CMOIO market. We continue to find it to be an attractivesegment of the market, but believe it no longer warrantsas substantial an allocation as it did a year ago. For thatreason, we are taking more of a balanced approach.The commercial mortgage market, lastly, continuedto post gains, and our funds generally hold modest allo-cations to the sector. The retail space sector has postedsolid gains in recent months, although we do harborsome concerns over the competitiveness of “brick andmortar” businesses in this economy. With consumerspending still under pressure and consumers particularlycost conscious, online retailers have been performingquite well. It remains to be seen whether and how thistranslates to the CMBS market. The office space segment,as we have discussed before, continues to show somesigns of weakness, with many corporations maintainingleaner headcounts in the post-2008 environment, whichtranslates into more muted demand. Overall, our outlookfor CMBS calls for continued improvements along withthe broader economy, and we believe a bottom-up,security-specific approach is more prudent than a blanketallocation to the asset class.Figure 4. Spread sectors’ excess returns over Treasuries-0.1%0.0%0.1%0.2%0.3%0.4%U.S. agencyMBSCorporatesCMBSABSSource: Barclays, as of 3/28/13. Past performance is not indicative of future results.Negative Treasuryreturns underscoredthe dangers of a long-duration strategy.
  • PUTNAM INVESTMENTS | putnam.com7Spreads continued to tighten in corporate debt,while fundamentals remain compellingCorporate debt continued to perform well in the firstquarter with high-yield and floating-rate debt outpacingthe investment-grade sector. As of the end of March,spreads in the high-yield market were slightly lower thantheir long-term average, finishing the quarter at 5.02%.While valuations aren’t as attractive as they were a yearago, we believe that there is still much that makes theasset class attractive, and that spreads could continue totighten further. As a reminder, spreads measure the yieldadvantage corporate debt offers over similarly datedTreasuries, and tightening spreads is typically a goodthing for existing bondholders. Prior to the 2008 creditcrisis, spreads in the high-yield market had tightened toabout 2.5% over Treasuries, so we believe there is ampleprecedent for spreads tighter than the current 502 basispoints. Moreover, the high-yield companies in the markettoday are significantly stronger than those of the universeof five or ten years ago specifically because the creditcrisis forced so many of the weakest companies out ofbusiness. The default rate today — at around 1.24% —remains well below its long-term historical average, whichis roughly 4.3%.The other factor that we find compelling is the scarcityof yield in the fixed-income market. Investors who maynot have been high-yield investors in previous years havebeen forced to reconsider the asset class with so fewother income-producing options available. Case in point,throughout 2012, flows into the high-yield and floating-rate segments of the market were exceptionally strong,and while 2013 is unlikely to be another record-settingyear, we don’t foresee a dramatic decline in demand.Floating-rate debt, meanwhile, has benefited frommany of the same trends we have seen at work in thehigh-yield space, but has the added benefit of helpingto insulate investors from the adverse effects of risingFigure 5. High-yield spreads and defaults generallymove in tandem over credit cycles048121620%0400800120016002000’11 ’12 3/31/13’10’09’08’07’06’05’04’03’02’01’00’99’98’97’96’95’94’93’92’91’90’89’88’87DefaultrateSpreads(bps)1990–91recession2001recession2007–09recessionCurrent spread: 502 bps (as of 3/31/13)20-year median spread: 536 bpsAverage default rate: 4.3%Today, the gap between spreadsand defaults remains wide, signalingopportunity for investorsHigh-yield default rateSpread to worstSources: JPMorgan, High Yield Market Monitor, 4/1/13. 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.Below-average defaultsand strong fundamentalssuggest that spreads couldpotentially tighten further.
  • 8APRIL 2013 | Fixed-Income OutlookFigure 6: Municipal bond credit spreads havenarrowed, but still remain attractiveMunicipal bond spreads by quality rating0100200300400500BBBAAA201320122011201020092008200720062005200420032002200120001999Sources: Putnam, as of 3/28/13. Credit ratings are as determined by Putnam.The most attractive relative valuesappear to be in the BBB-ratedsegment of the muni market.interest rates. By definition, the interest payments onfloating-rate notes reset periodically as short-terminterest rates change. While the outlook for the foresee-able future for short-term rates is fairly stable, the assetclass also offers investors protection from volatility inlonger-term rates beyond what the high-yield asset classoffers. There is reason to believe that investors have takennote, and that this particular feature of the asset class hasbecome more attractive over the past several months.Finally, our outlook for investment-grade corporatedebt is somewhat more cautious. To be sure, the financialhealth of corporations in the investment-grade spacecontinues to be quite strong. However, in a slow-growthmacroeconomic environment, we believe it will provechallenging for corporations to continue to improve theirmargins and increase their revenues. The risk, we feel,is not so much one of potentially deteriorating funda-mentals, but of investment-grade corporate debt havingreached something of a plateau. For those reasons,we generally prefer the opportunities in high yield andfloating rate in our multi-sector portfolios.
  • PUTNAM INVESTMENTS | putnam.com9Municipal bond investors gained clarity ontax rates, but a number of key policy issuesremain unresolvedIt is no surprise that for many months now the focal pointfor many discussions about municipal bonds has beenfederal policy and the potential risks entailed. By wayof background, on January 1, 2013, Congress enacted alast-minute tax deal to raise rates on top earners whilepreserving existing brackets for most other taxpayers.While the new higher rates for top earners has likelybolstered demand for municipal bonds by making theirtaxable equivalent yields that much more attractive, thecorrelation between tax rates and demand is never oneto one. Taxes are one factor among many that inves-tors consider when weighing their options for theirfixed-income portfolios and, to that end, the question ofwhether the income from municipal bonds will remainfully tax free is still unsettled.One potential outcome in a “grand bargain” on taxreform would cap the level of municipal bond interestthat can be claimed tax free, possibly at 28%. While weare skeptical of the prospects for any further significanttax reform under a divided Congress, and believe thisparticular outcome is unlikely, we do believe it remainsa possibility. We believe it is highly likely, however, thatchanges to the tax treatment of municipal bonds willcontinue to be floated in any negotiations about taxreform, so some short-term headline risk does exist.We are monitoring the situation closely.Beyond the issue of taxes, since January, much of thetalk from the political class has revolved around seques-tration, the other half of the fiscal cliff that mandated2% across-the-board spending cuts. While the politicalrhetoric associated with those cuts often has paintedthem as catastrophic, we believe the fallout for moststates is likely to be fairly benign. The cuts certainly won’tbe beneficial for states and local communities, but webelieve the effects will not be extremely widespread andthe impact will be staggered over time. Sectors and locali-ties that benefit most from federal support and areas thatare heavily reliant on military and defense spending arethe most likely to be negatively affected, we believe. Butat this point, it is difficult to quantify exactly how seques-tration will impact states’ finances. The ultimate impactwill depend on how well these states have prepared andbudgeted for the sequestration cuts.In terms of positioning, we continue to favor essen-tial service revenue bonds over local general obligationbonds. The BBB-rated segment of the curve continues tooffer attractive relative value opportunities, in our analysis,and in terms of maturities, we find 10 to 15 years to be theoptimal part of the yield curve in today’s environment. Forseveral months now, we have maintained a cash weightingin our portfolios that is slightly higher than normal, whichhas helped to offset some of the recent interest-rate vola-tility. We anticipate maintaining that stance through thespring, which tends to begin as a seasonally slower periodfor new issuance, and which will allow us a greater degreeof flexibility as issuance picks back up in the summermonths, as historically has been the case.Overall, we maintain our constructive outlook formunicipal bonds, though we believe that returns in 2013will be less about price appreciation and more aboutcoupon income in the tax-exempt market. While spreadsare much narrower than they were at their peak, theyremain attractive in certain credit-quality buckets, inour opinion. Although they were a little softer in March,technical factors in the market also have been decent —specifically, continued refunding activity and solid investordemand — and we believe that technicals should remainsupportive in 2013. While investors now have more near-term certainty on tax rates for 2013, there is still muchto be resolved, including federal budget sequestration,the debt ceiling, and the potential for broader tax reformduring the year, all of which could affect the value ofmunicipal bonds. As always, we are monitoring thesituation closely and positioning the funds accordingly.While we are skeptical of the prospects for any furthersignificant tax reform under a divided Congress, a cap onmunicipal bonds’ tax-exempt income remains a possibility.
  • 10APRIL 2013 | Fixed-Income OutlookU.S. dollar gained appeal as investors continued tomove off the sidelines and into risk assetsOn the currency front, our multi-sector portfolios continue to holda bias to the U.S. dollar, which generally has helped performancein recent months. For much of 2012, the U.S. dollar benefited fromrecurring flights to quality as investors rushed into Treasuries amidany signs of market turbulence. While the risk-on/risk-off mentalityhas been much less pervasive over the past several months, theU.S. dollar has continued to benefit as investors have regained theirrisk appetites. The United States was one of the first developedcountries to attempt to clean up the damage in its banking sector inthe wake of the financial crisis, while corporations aggressively cutcosts and shored up balance sheets. As a result, the United States isin a position today to attract risk capital in a way that makes it muchmore compelling, in our opinion, than many of the other optionsavailable in the developed world.One of the consequences of a strengthening U.S. dollar is often aweakening of currencies tied to commodity prices. For that reason,we have been more cautious in recent months on emerging-marketcurrencies in general, and have focused more on those countriesthat are more resilient to a possible slowdown in capital flows,including Mexico, Chile, Thailand, and the Philippines.Agencymortgage-backedsecurities are represented by the Barclays U.S. MortgageBacked Securities Index, which covers agency mortgage-backed pass-throughsecurities (both fixed-rate and hybrid ARM) issued by Ginnie Mae (GNMA), Fannie Mae(FNMA), and Freddie Mac (FHLMC).Commercialmortgage-backedsecurities are represented by the Barclays U.S. CMBSInvestment Grade Index, which measures the market of commercial mortgage-backedsecurities with a minimum deal size of $500 million. The two subcomponents of theU.S. CMBS Investment Grade Index are the U.S. aggregate-eligible securities andnon-eligible securities. To be included in the U.S. Aggregate Index, the securities mustmeet the guidelines for ERISA eligibility.Emerging-marketdebt is represented by the JPMorgan Emerging Markets GlobalDiversified Index, which is composed of U.S. dollar-denominated Brady bonds,eurobonds, traded loans, and local market debt instruments issued by sovereign andquasi-sovereign entities.Eurozonegovernment is represented by the Barclays Pan European Aggregate BondIndex, which tracks fixed-rate, investment-grade securities issued in the followingEuropean currencies: euro, British pound, Norwegian krone, Danish krone, Swedishkrona, Czech koruna, Hungarian forint, Polish zloty, and Swiss franc.Globalhighyield is represented by the JPMorgan Global High Yield Index, anunmanaged index of global high-yield fixed-income securities.Japangovernment is represented by the Barclays Japanese Aggregate Bond Index,a broad-based investment-grade benchmark consisting of fixed-rate Japaneseyen-denominated securities.Tax-exempthighyield is represented by the Barclays Municipal Bond High YieldIndex, which consists of below-investment-grade or unrated bonds with outstandingpar values of at least $3 million and at least one year remaining until their maturitydates.U.K.government is represented by the Barclays Sterling Aggregate Bond Index, whichcontains fixed-rate, investment-grade, sterling-denominated securities, including giltand non-gilt bonds.U.S.floating-ratebankloans are represented by the S&P/LSTA Leveraged LoanIndex, an unmanaged index of U.S. leveraged loans.U.S.governmentandagencydebt is represented by the Barclays U.S. AggregateBond Index, an unmanaged index of U.S. investment-grade fixed-income securities.U.S.investment-gradecorporatedebt is represented by the Barclays U.S. CorporateIndex, a broad-based benchmark that measures the U.S. taxable investment-gradecorporate bond market.U.S.taxexempt is represented by the Barclays Municipal Bond Index, an unmanagedindex of long-term fixed-rate investment-grade tax-exempt bonds.You cannot invest directly in an index.
  • PUTNAM INVESTMENTS | putnam.com11Putnam’s veteran fixed-incometeam offers a depth and breadthof insightSuccessful investing in today’s markets requiresa broad-based approach, the flexibility to exploita range of sectors and investment opportunities,and a keen understanding of the complexglobal interrelationships that drive the markets.That is why Putnam has more than 70 fixed-income professionals focusing on deliveringcomprehensive coverage of every aspect of thefixed-income markets, based not only on sector,but also on the broad sources of risk — andopportunities — most likely to drive returns.D. William KohliCo-Head of Fixed IncomeGlobal StrategiesInvesting since 1987Joined Putnam in 1994Michael V. SalmCo-Head of Fixed IncomeLiquid Markets and Securitized ProductsInvesting since 1989Joined Putnam in 1997Paul D. Scanlon, CFACo-Head of Fixed IncomeGlobal CreditInvesting since 1986Joined Putnam in 1999This material is provided for limited purposes. It is notintended as an offer or solicitation for the purchase or sale ofany financial instrument, or any Putnam product or strategy.References to specific securities, asset classes, and financialmarkets are for illustrative purposes only and are not intendedto be, and should not be interpreted as, recommendationsor investment advice. The opinions expressed in this articlerepresent the current, good-faith views of the author(s) at thetime of publication. The views are provided for informationalpurposes only and are subject to change. This material doesnot take into account any investor’s particular investmentobjectives, strategies, tax status, or investment horizon. Theviews and strategies described herein may not be suitablefor all investors. Investors should consult a financial advisorfor advice suited to their individual financial needs. PutnamInvestments cannot guarantee the accuracy or completenessof any statements or data contained in the article. Predictions,opinions, and other information contained in this article aresubject to change. Any forward-looking statements speakonly as of the date they are made, and Putnam assumes noduty to update them. Forward-looking statements are subjectto numerous assumptions, risks, and uncertainties. Actualresults could differ materially from those anticipated. Pastperformance is not a guarantee of future results. As withany investment, there is a potential for profit as well as thepossibility of loss.The information provided relates to Putnam Investments andits 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 inManitoba). Where permitted, advisory services are providedin Canada by Putnam Investments Inc. [InvestissementsPutnam Inc.] (o/a Putnam Management in Manitoba) and itsaffiliate, The Putnam Advisory Company, LLC.
  • 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 investin government securities are not guaranteed. Mortgage-backed securities are subject to prepayment risk. Derivativesalso involve the risk, in the case of many over-the-counter instruments, of the potential inability to terminate or sell deriv-atives 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 tofall if interest rates rise. Bond investments also are subject to credit risk, which is the risk that the issuer of the bond maydefault on payment of interest or principal. Interest-rate risk is generally greater for longer-term bonds, and credit riskis generally greater for below-investment-grade bonds, which may be considered speculative. Unlike bonds, funds thatinvest in bonds have ongoing fees and expenses.If you are a U.S. retail investor, please request a prospectus, or a summary prospectus if available, from yourfinancial 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 280509 4/13