Putnam Fixed Income Outlook q313Document Transcript
Arrows in the table indicate the change
from the previous quarter.
Fixed-income asset class
U.S. government and agency debt l
U.S. tax exempt l
Tax-exempt high yield l
Agency mortgage-backed securities 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 l
Core Europe government l
Peripheral Europe government l
Japan government l
Dollar vs. yen: Dollar
Dollar vs. euro: Dollar
Dollar vs. pound: Dollar
The end of QE coming into focus
In the second quarter of 2013, the debate
over the end of quantitative easing (QE)
became the focus of markets globally, which
culminated in June with a statement by Fed
Chairman Ben Bernanke on the economically
driven prospects for curtailing the Fed’s bond-
buying programs. This marked what may
prove to be a critical inflection point for the
Federal Reserve, the U.S. economy, and global
Since the financial crisis of 2008, the Fed
has been firmly committed to keeping interest
rates low for an extended period of time,
providing liquidity to bond markets. But with
the recent talk of QE tapering, the markets
are faced with a potential liquidity drain as the
Fed may soon claim success and back away
from its QE program. The market’s reaction
to this potential change was anything but
calm. Across most fixed-income markets,
bond yields rose, spreads to Treasuries
widened, and bond prices fell. The yield on the
10-year Treasury note, for example, backed
up in dramatic fashion, moving from an
intra-quarter low of 1.63% on May 2 to 2.67%
following Chairman Bernanke’s remarks. As
a result of this new phase in the recovery
dialogue, we believe markets will continue
to see higher volatility in rates, although the
range we expect in the near term for 10-year
Treasuries — between 2.25% and 2.75% — is
not high by historical standards.
Volatility has generally been elevated
since May, and has cut across fixed-income
and equity sectors alike. The questions that
are raised by increased volatility as a result
of merely discussing the pullback in QE are
• We expect the U.S. economy to improve, which could tilt the
Fed toward curtailing bond purchases in the fall.
• We expect interest rates will stay elevated — in a range of
2.25% to 2.75% for 10-year Treasuries — and volatile.
• Spread sectors look attractive to us going forward, although
security selection will likely add more value than broad
• Interest-rate volatility may provide opportunities for tactical
duration positioning and prepayment strategies.
Q3 2013 » Putnam Perspectives
Q3 2013 | Fixed-Income Outlook
difficult to answer: Can the United States stay on the path
of economic recovery and normalization in an environ-
ment of higher rates? And what do fixed-income markets
look like if government-provided liquidity support is no
longer part of the equation? As the Fed continues to
publicly consider its exit plan from QE, we see markets
grappling with these questions in the months ahead —
particularly as the Fed nears its mid-September meeting
for reopening the end-of-QE debate.
Our outlook for continued economic recovery
Despite higher taxes, generally rising interest rates,
and broad-based budget cuts enforced by the federal
sequester, the U.S. recovery appeared to remain on
track through the second quarter, and we see the United
States maintaining this course in the months ahead.
From housing market gains and declining unemployment
figures to encouraging manufacturing data and corpo-
rate fundamentals, the balance of data was pleasantly
surprising through the end of the second quarter of 2013.
This was a welcome change over recent years, where
the end of the second quarter saw the onset of a summer
slowdown. While the economy initially appeared to be
in the process of repeating this pattern in 2013, data
improved toward quarter-end. And while this may
have contributed to the Fed’s willingness to discuss its
processes for evaluating and implementing an end to
QE, we think it bodes well for select areas of the fixed-
Importantly, we expect that the benchmark Barclays
U.S. Aggregate Bond Index will continue to be a poor
representative of value in the domestic fixed-income
marketplace. At an average duration of approximately five
years, the index, and strategies that are aligned closely
to it, may be overexposed to interest-rate risk. Given the
climate of rising rates — and the degree to which rates
have shown their ability to back up on fears of the eventual
QE withdrawal — we believe term structure risk, which
dominates the Aggregate Index, is best avoided in favor of
sectors with more attractive risk-and-return profiles.
Figure 1: The second quarter erased
2Q 131Q 13
Source: Putnam research, as of 6/30/13. Past performance is not indicative of future results. See page 10 for index definitions.
Fixed-income assets suffered
as interest rates rose and bond
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Mortgage-related debt: potential gains from
tailwinds in the housing recovery
If the economy makes advances as we think it will, the U.S.
housing market should continue to grow stronger and
opportunities in mortgage-related debt markets should
continue to exhibit attractive characteristics. We do not
see higher rates derailing or detracting significantly from
the housing recovery. In our view, the housing market
advance has not been a function of low mortgage rates,
but rather has been driven by overall economic activity and
confidence levels. With an economic recovery underway,
nominally higher interest rates may simply be trumped by
improving housing market fundamentals, new household
formation trends, and growing consumer strength.
Our perspective on mortgage-related opportunities,
regardless of the prevailing economic conditions, centers
on two major forms of risk. The first of these is prepay-
ment risk. In light of the prevailing policy uncertainty
and the historically low rate environment at the start of
the second quarter, we cut back on prepayment risk by
reducing our holdings of collateralized mortgage obliga-
tions (CMOs). Following significant underperformance and
spread widening in April and May, we sought to capitalize
on CMOs’ improved relative value by adding them back to
a number of our portfolios. With the increase in interest
rates, CMOs rallied as prepayments slowed within the
pool of underlying mortgages. As the tug of war between
housing strength and higher rates plays out, we expect to
continue to operate tactically in this space, taking advan-
tage of market volatility as much as possible.
The second area of mortgage-related risk is credit
risk. Our mortgage credit holdings — both non-agency
residential mortgage-backed securities (RMBS) and
commercial mortgage-backed securities (CMBS) —
had mixed results in the second quarter. RMBS had an
up-and-down quarter. Through mid-May, the sector had
outperformed duration-adjusted Treasuries at a faster
pace than in the first quarter. Average spreads for the
sector tightened by approximately 50 basis points (bps)
during this period, driven by a continued positive tech-
nical environment as investors regained their appetite
for higher-yielding securities and the declining size of the
market supported prices. Fundamentals also supported
the market with positive home-price data, reduced delin-
quency trends, and continued activity from buy-to-rent
investors. The latter part of the quarter exhibited signifi-
cant underperformance due primarily to technical factors.
Average spreads for the sector over the entire quarter
widened by approximately 100 bps.
Despite underperformance for the overall sector, our
holdings in commercial mortgage-backed securities
(CMBS) aided performance, especially earlier in the period
as investors took advantage of attractive spreads and
positive underlying fundamentals in the sector.
We sought to reduce risk during the quarter by shifting
allocations from RMBS into better-performing CMBS. As
with our prepayment strategies, toward the quarter’s end
we began to add mortgage credit risk back into our port-
folios in light of recent spread widening, and will continue
to seek to make volatility work to our advantage.
Given the climate of rising rates — and the degree to which rates have shown
their ability to back up on fears of the eventual QE withdrawal — we believe
term structure risk is best avoided in favor of sectors with more attractive
Q3 2013 | Fixed-Income Outlook
High yield and bank loans: low default
expectations and capital appreciation potential
With respect to opportunities in high-yield bonds, the
biggest change in the second quarter centered on market
technicals. Outflows from some large mutual funds and
exchange-traded funds (ETFs), in addition to some large
allocation changes by institutional investors, upset the
balance of high-yield supply and demand, leading to a
fairly disruptive environment for the sector. Along with
other credit-sensitive fixed-income categories, high-yield
bond results struggled during May and June, and our
general allocation to the asset class detracted from port-
The flip side of this heightened illiquidity is that the
prices of many high-yield bonds declined to what we
believe are attractive levels. When we consider the
general cohort of high-yield issuing companies, we see a
strong fundamental backdrop and expect that defaults
will hover near historically low levels.
Although we take a more skeptical view of cyclical
sectors, such as natural resources — particularly coal
and metals and mining companies — we are more posi-
tive on retail, cable, and wireless industries, where we
see the potential for continued consolidation. Merger
and acquisition activity, which has room to grow in an
improving macro environment, is largely beneficial for
high-yield issuers. With economic tailwinds, and following
an extended period of cost-cutting, many larger compa-
nies want to buy smaller companies in order to gain scale,
and add new capabilities or enhance existing ones. And
with high-yield bond prices lower relative to more recent
premium levels, the potential for capital appreciation
cannot be overlooked.
Figure 2. Rates leapt higher as the Fed
discussed winding down its
Source: U.S. Department of the Treasury, as of 6/30/13.
Policy uncertainty could keep rate
volatility elevated in the months ahead.
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Figure 3. Current spreads relative to historical norms
n Average excess yield over Treasuries
n Current excess yield over Treasuries
(OAS as of 6/30/13)
Year to date, one of the stronger-performing credit
subsectors has been bank loans. Bank loans have been
available at attractive spreads over prevailing short-term
rates, and as short-term interest rates start to increase,
bank loan coupons are structured to reset higher. In addi-
tion, the sector has benefited from prevailing fundamental
strength among loan issuers, and particularly in light of
the fact that many issuers have refinanced other obliga-
tions that they accumulated between 2007 and 2009.
Like high-yield debt, bank loans may stand to benefit
from an improving macro environment in which M&A
activity is on the rise. Funding acquisitions with bank loans
is an attractive option for many companies, as interest
rates on these loans tend to be lower and because the
loans are generally free of restrictions on prepayment at
par value. As we expect the broad market to continue to
focus on the potential magnitude of rates’ upward trajec-
tory, and as we expect a supportive economic backdrop to
fuel M&A activity, bank loans may be relatively well posi-
tioned to outperform.
Sources: Barclays, Putnam, as of 6/30/13.
Data are provided for informational use only. Past performance is no guarantee of future results. All spreads are in basis points and measure option-
adjusted 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 repre-
sented 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.
High yieldAAA CMBSInvestment-grade
High yieldAAA CMBSInvestment-grade
Spreads widened but in
many cases remained
close to their historical
Q3 2013 | Fixed-Income Outlook
Investment-grade credit: sector-based pockets
of relative strength
Like most other sectors in the recent quarter, longer-
dated, investment-grade markets were shaken by rate
jitters and the knock-on performance effects of invest-
ment outflows. Overall, we are finding better relative value
opportunities in the short to medium range of the yield
curve, as longer-dated credits may be overexposed to
In terms of sectors, we continue to see banking as one
of the bright spots for investment-grade corporate credit.
The passage of industry regulation, including higher
capital requirements, has essentially transformed this still-
recovering sector. What was once a high-growth industry
with attractive returns from an equity perspective is now
a source of low and stable growth, which from an income
investor’s perspective is highly desirable.
Other sectors that we like going forward include utili-
ties and economically sensitive industries. Like banking,
the utilities sector is increasingly regulated, which confers
a level of perceived stability that recommends the sector
to income investors. On the economically sensitive front,
the U.S. shale-gas boom has lowered input costs of fuel
production and hence has given the entire petrochemical
industry an enormous boost, including downstream
industries focused on fertilizers and chemicals. Profit
margins in these areas are as wide as they’ve been for
some time, and we believe this condition is likely to persist.
Sectors with less compelling prospects include phar-
maceuticals and defense, which are trading very tight
to Treasuries, and where we don’t foresee a great deal
of improvement in the near future. Consequently, these
sectors form some of the largest underweights in our
investment-grade credit portfolios.
Figure 4. Spread sectors’ negative excess
returns relative to Treasuries
Source: Barclays, as of 6/30/13. Past performance is not indicative of future results.
Bond returns suffered broadly as
markets reacted poorly to a potential
change in Fed policy.
To the extent that interest rates rise on the long end of the yield curve and people
believe in the sustainability of U.S. economic strength, a variety of U.S. assets
become more attractive.
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Global bonds: opportunities in the making
In Europe, debt-challenged peripheral European coun-
tries exhibited unanticipated health through the second
quarter, which was largely a function of declining sover-
eign borrowing costs. Italy and Spain, for example,
appeared able to fund themselves, while core European
countries experienced some economic setbacks. More
recently, data out of Germany and Switzerland improved,
which contributes to our sense of continued recovery in
In Japan, policymakers are actively pursuing a QE
policy experiment, which has led to substantial volatility
in equity markets there. Japanese stocks have appreci-
ated at a rapid pace since last November, but in the recent
quarter have retraced a good portion of their gains. Simi-
larly, the yen very quickly declined substantially relative
to other major currencies, but then reversed course for a
time before resuming its weakening trend. Despite global
competitiveness among certain Japanese exporters, we
have yet to see the Japanese economy exhibit a funda-
mental shift toward growth in response to policymakers’
QE program, and Japan remains an area that we will
monitor closely for investment opportunities.
Figure 5. High-yield spreads and defaults generally
move in tandem over credit cycles
’11 ’12 6/30/13’10’09’08’07’06’05’04’03’02’01’00’99’98’97’96’95’94’93’92’91’90’89’88’87
Current spread: 538 bps (as of 6/30/13)
20-year median spread: 538 bps
Average default rate: 4.3%
Today, the gap between spreads
and defaults remains wide, signaling
opportunity for investors
High-yield default rate
Spread to worst
Sources: JPMorgan, High Yield Market Monitor, 6/30/13. 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.
and strong fundamentals
suggest that spreads could
potentially tighten further.
Q3 2013 | Fixed-Income Outlook
Figure 6: Municipal bond credit spreads widened
Municipal bond spreads by quality rating
Sources: Putnam, as of 6/30/13. Credit ratings are as determined by Putnam.
The most attractive relative values
appear to be in the BBB-rated
segment of the muni market.
The key weak spot that gives us pause is China, which we
expect will continue to encounter downgrades to its growth
outlook. Shortly into the third quarter, China’s GDP growth
registered at 7.5%, but outlier forecasts of 3% to 4% growth
rates in China going forward indicate the level of skepti-
cism over China’s ability to maintain its profile of robust
expansion. Commodity export-dependent emerging
markets may continue to get caught in the wake of this
slowdown, which contributes to our rationale for taking a
cautious stance with respect to emerging-market debt.
unwinding the carry trade
An important thread in the story of global markets over
the past decade has involved the so-called “carry trade”:
for example, borrowing yen and investing in higher-
yielding commodity currencies in the 2002–2007 period
or, more recently, borrowing dollars and investing in
emerging-market bonds. As continued monetary stimulus
in the United States began to look less certain in June, the
carry trade in emerging-market debt started to unwind.
Consequently, we saw credit spreads start to widen in
emerging markets in advance of spread widening in U.S.
high-yield and investment-grade corporate debt markets.
This growing perception of increasing credit risk put
downward pressure on bond prices. From our perspec-
tive, the near-term outlook for emerging-market debt
argues for caution.
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To the extent that interest rates rise on the long end
of the yield curve and people believe in the sustainability
of U.S. economic strength, a variety of U.S. assets
become more attractive while emerging markets become
less attractive to investors. The risk is that talk of QE
tapering and its eventual removal leads to real economic
consequences for emerging markets and elsewhere. In
this way, QE tapering — which has been forecast to begin
later this year, provided that data indicate continued U.S.
economic strength — runs the risk of causing economic
deterioration elsewhere in the world, particularly in the
This is not to say that emerging markets no longer
present opportunities. Importantly, we believe funda-
mentals are generally positive in the emerging markets
and that growth rates in these countries will continue to
surpass those in the developed world. Emerging-market
growth, compared with that of the past, has slowed some-
what, particularly where it is linked to China’s demand
for commodities. But the underlying credit strength of
emerging-market sovereigns still looks quite good, in
our view. In our emerging-market portfolios, we have
established what we believe is a good mix of sovereign
exposures, including a portfolio of U.S.-dollar-denomi-
nated debt issued by what we consider to be relatively
stable countries, such as Brazil, Mexico, and Peru, in
addition to debt issued by some riskier countries. Our
aggregate local-currency position, moreover, is tracking
relatively close to the benchmark.
Municipal bonds: fundamental strength with
headline risks to watch
Heightened uncertainty on many fronts contributed to a
mixed picture for the municipal bond market in the second
quarter. In April, the market followed Treasuries to some
extent, and benefited as rates moved lower and prices
moved higher. However, following the Fed’s discussion
around tapering its bond-buying program, there was a
notable sell-off from May into June as investors worried
about rising rates and a more hawkish Fed. This sell-off
erased gains that were made in April.
While we expect market volatility among munis in the
near term, we continue to have a constructive outlook
and believe munis still offer a good option for long-term
investors seeking tax-exempt income. Although signifi-
cant outflows have compounded the sell-off in municipal
bonds, the recent rise in rates has resulted in a decreased
supply of bonds for refunding purposes; and total supply
is down 11.5% year-over-year through the end of June.
Also, the increase in yields may bring in crossover buyers
and direct retail investors to help support technicals in the
market. Aside from isolated credits such as Detroit and
Puerto Rico, fundamentals within the municipal market
are generally improving. It is likely that factors such as
interest rates and the direction of the economy could
continue to influence market activity.
A degree of uncertainty over tax policy has been
clarified, as income tax rates for 2013 are now certain.
However, other policy issues that can affect the value of
municipal bonds remain unresolved, including federal
budget sequestration, the debt ceiling, and the potential
for broader tax reform. We are monitoring developments
in these areas.
As has been our strategy for some time, we continued
to favor essential service revenue bonds over local general
obligation bonds. From a credit-quality perspective, overall
default rates remain low. In our analysis, the A-rated and
BBB-rated segments of the market continue to offer
attractive relative value opportunities. We generally favor
higher-yielding sectors and issues with below-average
sensitivity to interest rates.
We favor long positions in the U.S. dollar. We think the Fed
will be the first of the major central banks to start exiting
unconventional monetary policy, and it seems that late
summer/early fall is the most likely point for the Fed to
begin this process. Over the medium term, the U.S. dollar
should be supported by a relatively better growth outlook
and a gradual reduction in the pace of accommodation
by the FOMC, as well as by the time effect of approaching
current forward guidance for the first rate hike in 2015.
For the euro, as well, we favor a slightly long position,
but not against the U.S. dollar. The single currency remains
supported by healthy trade flows — the eurozone is set to
run a current account surplus exceeding 2% of GDP this
year. In contrast, the upside for the euro remains capped
by the risk of further cyclical monetary easing from the
European Central Bank.
While the beginning of the end of QE may have gotten off to a rocky start, we are
generally optimistic about how the transition will progress.
Q3 2013 | Fixed-Income Outlook
With respect to the Japanese yen, we expect renewed
weakness. Over the medium term, the Bank of Japan is
expected to do much more easing and this should provide
further impetus for the U.S. dollar to rally versus the yen.
At this time of writing, the ruling Liberal Democrats had
just retaken the Diet’s upper house, creating the prospect
of political stability and policy continuity that should, we
believe, encourage Japanese investors to take more risk in
both the Nikkei and higher-yielding foreign assets.
For the Australian dollar, we favor a short position. The
market now seems to view the Chinese growth outlook of
7.5% more carefully and no longer expects easier mone-
tary or fiscal policy to keep growth rates more elevated.
With external support a bit weaker, the RBA has main-
tained an easing bias, stating that lower levels of inflation
provide room for even easier policy, which should keep
pressure on the currency.
Amid lower levels of global growth and lower
commodity prices and inflation, emerging-market central
banks have shifted into easing mode. Emerging-market
currencies remain over-owned in a world where U.S. term
structure is likely to grind higher. With weaker current
account surpluses in emerging markets, large capital
outflows are a major risk for emerging-market currencies.
While the beginning of the end of QE may have gotten
off to a rocky start, we are generally optimistic about
how the transition will progress. As the general rate
environment evolves from ultra low levels to higher —
but still historically low — levels, we expect volatility in
rates and spreads to remain high. In preparation for this
condition, we dialed back risk in a variety of fixed-income
sectors, but in some cases have already added risk back to
portfolios where we deemed markets presented us with
attractive re-entry points.
Overall, we see the United States as the safest haven
among global markets going forward. If the U.S. economy
continues to improve, as we expect it will, the market may
anticipate impending action by the Fed to curb QE, in
which case we would expect rates to move to and poten-
tially exceed the high end of our projected range. In our
view, this scenario makes thinking outside the index, with
a focus on less interest-rate-sensitive securities and strat-
egies, all the more vital to fixed-income investors.
Agencymortgage-backedsecurities 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).
Commercialmortgage-backedsecurities 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.
Emerging-marketdebt 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
Eurozonegovernment 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.
Globalhighyield is represented by the JPMorgan Global High Yield Index, an
unmanaged 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 Japanese
Tax-exempthighyield 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
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.
U.S.floating-ratebankloans are represented by the S&P/LSTA Leveraged Loan
Index, an unmanaged index of U.S. leveraged loans.
U.S.governmentandagencydebt is represented by the Barclays U.S. Aggregate
Bond Index, an unmanaged index of U.S. investment-grade fixed-income securities.
U.S.investment-gradecorporatedebt 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.taxexempt is represented by the Barclays Municipal Bond Index, an unmanaged
index of long-term fixed-rate investment-grade tax-exempt bonds.
You cannot invest directly in an index.
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Putnam’s veteran fixed-income
team offers a depth and breadth
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 fixed-
income 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
Investing since 1987
Joined Putnam in 1994
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Co-Head of Fixed Income
Liquid Markets and Securitized Products
Investing since 1989
Joined Putnam in 1997
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Co-Head of Fixed Income
Investing since 1986
Joined Putnam in 1999
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References to specific securities, asset classes, and financial
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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
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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.
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.
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