Municipal bond prices moved lower during the second quarter, as fears about the Federal Reserve tapering its stimulus program rattled the financial markets. While a handful of states still face some budget pressure for the remainder of their 2013 fiscal year, 45 states reported that they are likely to meet or exceed their revenue projections for fiscal year 2013. Interest-rate volatility and the longer term prospect of higher rates have reinforced our bias toward a more limited duration stance. We continue to overweight essential-service revenue bonds, as well as the A-rated and BBB-rated segments of the market. Our outlook calls for defaults to remain low and continued gradual economic recovery.
The Case for AAA Underlying Municipal BondsIan Welch
4
Intent
• Create AAA Underlying Portfolio
• Create Default Resistant Portfolio
• Take advantage of sell side pressure
• Take advantage of negative perception of municipal bond market to amass AAA bonds
Fitch affirms south africa at 'bb+'; outlook stableSABC News
South Africa's ratings are weighed down by low trend growth, sizeable government debt and contingent liabilities and deteriorating governance standards. These weaknesses are balanced by a favourable government debt structure, deep local capital markets and a flexible exchange rate that helps to absorb external shocks. The affirmation reflects that while a number of developments point to a weaker fiscal outlook and consequent faster pace of debt accumulation, potential fiscal consolidation measures after the ANC's elective conference in December could mitigate those trends. Additionally, GDP growth could recover more strongly than currently anticipated if the outcome of the conference is viewed favourably by consumers and businesses.
China’s turning to “tough gradualism” in discipling local government borrowin...Terry Zhang
HONG KONG, 17 Jan 2018. Pengyuan International has released a research report, titled “China’s Turning To “Tough Gradualism” In Disciplining Local Government Borrowing Foretells Higher Risk of LGFV Default”. This research report is accessible via the link: http://www.pyrating.com/CreditResearch.
The first default on public bond of local government financing vehicles in China (LGFVs) could possibly happen in 2018, although the odds are still less than 50% according to a report published today by Pengyuan International titled “China’s Turning To ‘Tough Gradualism’ In Discipling Local Government Borrowing Foretells Higher Risk of LGFV Default”.
The central government of China launched recently a three-year critical battle against financial risks. Allowing LGFV default (“shock therapy”) may become a policy choice to dispel investor belief in implicit government support to LGFVs and thus help tame hidden local government borrowing, which occurred primarily through LGFVs.
“We believe Chinese government is turning to ‘tough gradualism’ rather than “shock therapy” in disciplining local government borrowing”, said Liang Zhong, analyst of Pengyuan International, “in another word, the central government is likely to tighten relevant discipline gradually, bearing in mind the needs to balance between achieving growth target and securing financial stability”.
The report argues that the “tough gradualist approach” means some type of credit events could happen before the others. For instance, the first default on public bond by LGFV sector in onshore market is likely to precede LGFV default on public bond in offshore.
As the risk of LGFV default rises, greater scrutiny of LGFV creditworthiness becomes increasingly necessary, including scrutinizing provincial economic and fiscal data according to the report.
“If China’s central government adheres to ‘tough gradualism’, namely tightening discipline steadily over local government borrowing, there it is good chance that the once relentless hidden LGT borrowing could be tamed markedly within three years.” Said Mr. Zhong.
ANALYSTS CONTACT
Mr. Liang Zhong
+852 3596 6140
liang.zhong@pyrating.com
MEDIA CONTACT
media@pyrating.com
OTHER ENQUIRIES
contact@pyrating.com
The Case for AAA Underlying Municipal BondsIan Welch
4
Intent
• Create AAA Underlying Portfolio
• Create Default Resistant Portfolio
• Take advantage of sell side pressure
• Take advantage of negative perception of municipal bond market to amass AAA bonds
Fitch affirms south africa at 'bb+'; outlook stableSABC News
South Africa's ratings are weighed down by low trend growth, sizeable government debt and contingent liabilities and deteriorating governance standards. These weaknesses are balanced by a favourable government debt structure, deep local capital markets and a flexible exchange rate that helps to absorb external shocks. The affirmation reflects that while a number of developments point to a weaker fiscal outlook and consequent faster pace of debt accumulation, potential fiscal consolidation measures after the ANC's elective conference in December could mitigate those trends. Additionally, GDP growth could recover more strongly than currently anticipated if the outcome of the conference is viewed favourably by consumers and businesses.
China’s turning to “tough gradualism” in discipling local government borrowin...Terry Zhang
HONG KONG, 17 Jan 2018. Pengyuan International has released a research report, titled “China’s Turning To “Tough Gradualism” In Disciplining Local Government Borrowing Foretells Higher Risk of LGFV Default”. This research report is accessible via the link: http://www.pyrating.com/CreditResearch.
The first default on public bond of local government financing vehicles in China (LGFVs) could possibly happen in 2018, although the odds are still less than 50% according to a report published today by Pengyuan International titled “China’s Turning To ‘Tough Gradualism’ In Discipling Local Government Borrowing Foretells Higher Risk of LGFV Default”.
The central government of China launched recently a three-year critical battle against financial risks. Allowing LGFV default (“shock therapy”) may become a policy choice to dispel investor belief in implicit government support to LGFVs and thus help tame hidden local government borrowing, which occurred primarily through LGFVs.
“We believe Chinese government is turning to ‘tough gradualism’ rather than “shock therapy” in disciplining local government borrowing”, said Liang Zhong, analyst of Pengyuan International, “in another word, the central government is likely to tighten relevant discipline gradually, bearing in mind the needs to balance between achieving growth target and securing financial stability”.
The report argues that the “tough gradualist approach” means some type of credit events could happen before the others. For instance, the first default on public bond by LGFV sector in onshore market is likely to precede LGFV default on public bond in offshore.
As the risk of LGFV default rises, greater scrutiny of LGFV creditworthiness becomes increasingly necessary, including scrutinizing provincial economic and fiscal data according to the report.
“If China’s central government adheres to ‘tough gradualism’, namely tightening discipline steadily over local government borrowing, there it is good chance that the once relentless hidden LGT borrowing could be tamed markedly within three years.” Said Mr. Zhong.
ANALYSTS CONTACT
Mr. Liang Zhong
+852 3596 6140
liang.zhong@pyrating.com
MEDIA CONTACT
media@pyrating.com
OTHER ENQUIRIES
contact@pyrating.com
FRB-Richmond_ unsustainable fiscal policy_ implications for monetary policyFred Kautz
Economic research suggests that high debt levels ultimately could overwhelm a central bank’s efforts to keep prices stable. This essay will argue that these outcomes should be avoided in the United States by putting fiscal policy on a sustainable path.
Public investments can boost economy more than private onesALTAX Consulting
The general idea is that if a critical mass of small investments is undertaken simultaneously the average social return will be much higher than the average private return, because they will create demand for each other, and overcome coordination failures that keep private market economies in a low-income equilibrium.
After all the debate in recent weeks over issues related to raising the nation's debt limit, it's hard to know exactly what might happen after August 2. Borrowing represents more than 40% of the nation's expenses, and any default on the country's obligations would be unprecedented.
It is impossible to stay solvent with increasing liabilities and decreasing assets. State and Municipal governments are faced with a crucial problem; how to pay off public sector pension plans which have been left underfunded for years. Adding insult to
injury, the market values of the portfolios used to fund these pensions plans have been crippled in the Great Recession. Even more troubling, these defined pension plans, by law, are guaranteed for nearly 80% of public officials no matter the performance of the underlying assets used to finance them. Legislatures are faced with few options; raise taxes, cut spending elsewhere or default on their GO debt.
Remarks by Robert L. Reynolds, President and Chief Executive Officer, Putnam InvestmentsFinancial Advisor/Private Wealth Innovative Retirement SymposiumOrlando, Florida, March 12, 2013
One reason I was pleased to be invited is that Financial Advisor’s slogan, “Knowledge for the Sophisticated Investor,” echoes the core themes I want to talk with you about today. I believe that there is a crying need — among asset managers, advisors, and investors — for new thinking and new solutions.
Abraham Lincoln’s great adage “As our case is new, so we must think anew and act anew” has never been more relevant. Five years after the worst economic crisis to hit global capitalism in our lifetimes, we are still feeling the aftershocks. We find ourselves moving ever so tentatively into a financial future about which the only thing we seem sure of is that it will likely be very different than the investment world we all grew up with.
Core topics
To me, this suggests that the conventional wisdoms shaped by decades of high-return investing — first in equities from 1982 to 2000, then in fixed-income markets over most of this young century — need to be re-examined, revised, or even scrapped.
And while I certainly don’t claim to have all the answers, I do want to sketch some of the new solution-oriented approaches that Putnam sees emerging, such as innovative investment strategies, changed views on portfolio construction, greater risk-awareness, and advances in practice management, including new technologies to enable advisors to reach and influence clients.
I would also like to suggest three retirement policy innovations that the financial services industry should take the lead on — now.
• 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.
FRB-Richmond_ unsustainable fiscal policy_ implications for monetary policyFred Kautz
Economic research suggests that high debt levels ultimately could overwhelm a central bank’s efforts to keep prices stable. This essay will argue that these outcomes should be avoided in the United States by putting fiscal policy on a sustainable path.
Public investments can boost economy more than private onesALTAX Consulting
The general idea is that if a critical mass of small investments is undertaken simultaneously the average social return will be much higher than the average private return, because they will create demand for each other, and overcome coordination failures that keep private market economies in a low-income equilibrium.
After all the debate in recent weeks over issues related to raising the nation's debt limit, it's hard to know exactly what might happen after August 2. Borrowing represents more than 40% of the nation's expenses, and any default on the country's obligations would be unprecedented.
It is impossible to stay solvent with increasing liabilities and decreasing assets. State and Municipal governments are faced with a crucial problem; how to pay off public sector pension plans which have been left underfunded for years. Adding insult to
injury, the market values of the portfolios used to fund these pensions plans have been crippled in the Great Recession. Even more troubling, these defined pension plans, by law, are guaranteed for nearly 80% of public officials no matter the performance of the underlying assets used to finance them. Legislatures are faced with few options; raise taxes, cut spending elsewhere or default on their GO debt.
Remarks by Robert L. Reynolds, President and Chief Executive Officer, Putnam InvestmentsFinancial Advisor/Private Wealth Innovative Retirement SymposiumOrlando, Florida, March 12, 2013
One reason I was pleased to be invited is that Financial Advisor’s slogan, “Knowledge for the Sophisticated Investor,” echoes the core themes I want to talk with you about today. I believe that there is a crying need — among asset managers, advisors, and investors — for new thinking and new solutions.
Abraham Lincoln’s great adage “As our case is new, so we must think anew and act anew” has never been more relevant. Five years after the worst economic crisis to hit global capitalism in our lifetimes, we are still feeling the aftershocks. We find ourselves moving ever so tentatively into a financial future about which the only thing we seem sure of is that it will likely be very different than the investment world we all grew up with.
Core topics
To me, this suggests that the conventional wisdoms shaped by decades of high-return investing — first in equities from 1982 to 2000, then in fixed-income markets over most of this young century — need to be re-examined, revised, or even scrapped.
And while I certainly don’t claim to have all the answers, I do want to sketch some of the new solution-oriented approaches that Putnam sees emerging, such as innovative investment strategies, changed views on portfolio construction, greater risk-awareness, and advances in practice management, including new technologies to enable advisors to reach and influence clients.
I would also like to suggest three retirement policy innovations that the financial services industry should take the lead on — now.
• 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.
The fourth quarter of 2012 brought an abundance of angst and speculation surrounding how, and
when, Congress might resolve its ongoing battle over fiscal policy. As investors worried about the
impact of the tax and spending provisions the Budget Control Act of 2011 would have on an already
fragile economy, Congress showed little inclination to reach a bi-partisan compromise. For more info: www.nafcu.org/nifcus
Global bond markets fell in May and June, as investors contemplated the end of massive liquidity from the U.S. Federal Reserve’s bond-buying program. The fund’s overweight exposure to the strengthening U.S. dollar aided performance during the quarter, as did our holdings of commercial mortgage-backed securities. Our mortgage credit holdings and our allocation to high-yield bonds generated positive returns early in the period before investors began to shed risk in May, but the positions remained positive overall for the quarter. We have a generally positive outlook for global economic growth and are seeking to capitalize on opportunities in spread sectors exhibiting improved relative value.
As Fed tapering unfolds, we expect to see stronger growth from developed markets, while emerging markets in aggregate may experience further currency and capital market weakness. In the United States, declining labor participation continues to drive falling unemployment figures, and may harbor the beginning of a wage inflation surprise.
• We expect credit, liquidity, and prepayment risks will continue to
be rewarded by the market in the months ahead, while interestrate
risk remains unattractive due to its asymmetric risk profile.
Mercer Capital's Atlantic Coast Bank Watch | August 2013Mercer Capital
The August 2013 issue of Bank Watch is available now at www.mercercapital.com, and features articles by Jeff Davis, Madeleine Davis, and the announcement of an upcoming webinar on the recently finalized capital rules.
In November 2011, after months of debate, Congress was unable to arrive at an agreement to gradually reduce
the U.S. deficit. As a result, they deferred any decision by implementing a process called sequestration, scheduled
to take effect in January 2013. This draconian option was thought sufficient to motivate both political parties to
focus on resolving their differences. It was never intended to actually take effect, as it will trigger across- the- board
spending cuts of $1.2 trillion over 10 years to both domestic and defense programs. For more info: www.nafcu.org/nifcus
The less transparent, often misunderstood high yield municipal bond sector offers not only unusually high tax exempt income, but a mostly unrecognized source of long run diversification with the taxable high grade (re what the Fed says and does) bond market.
07 August 2013--Understanding the Fed's Latest MovesEconReport
The Federal Reserve Chairman, Ben Bernanke, made some statements on 19 June 2013 that sent shockwaves
throughout the financial markets in the United States and Asia. There is no change in policy. This, Chairman Bernanke,
emphatically stated several times at the 19 June 2013 press conference. So why did the markets react the way they did?
This analysis will assist in understanding why the markets responded in the manner that they did to Chairman Bernanke's
suggestion that the asset-purchasing program will “taper off” in late 2013 or in mid- to late-2014 although this possibility
is clearly stated in the Federal Reserve's Open Market Committee's (FOMC's) 22 May 2013 statement.
Similar to Putnam municipal bond funds Q&A Q2 2013 (20)
Putnam Investment's 2015 Financial Advisors and Social Media SurveyPutnam Investments
Putnam Investments surveyed over 800 financial advisors to learn more about how they are using social media for business. The findings are the fourth annual iteration of the study.
U.S. equities continued their impressive advance, with
no significant declines during the quarter. In Europe, policy changes may function as an important tailwind for growth and market performance. Globally, M&A activity has been on the rise, giving a boost to equity prices across the market-cap spectrum. The current bull market has been significant — in terms of both length and magnitude.
The global economy is improving overall, with the U.S. and U.K. leading the way. We expect higher GDP growth from the U.S. to support risk assets in the third quarter. We continue to expect a rise in U.S. interest rates in 2014, though eurozone policy may help slow a near-term increase. We favor credit, prepayment, and liquidity risks, which we express in allocations to mezzanine CMBS, peripheral European sovereigns, select EM sovereigns, and interest-only (IO) CMOs.
Signs of inflation will raise the stakes for the Fed’s policy communications. Favorable conditions for leveraged strategies could reverse quickly. Reasonable valuations and the Fed’s policy goals continue to support risk assets.
We expect rate volatility to remain high as Fed tapering continues and as the U.S. labor market struggles to normalize. In Europe, the European Central Bank has moved a step closer to easier monetary policy, which may drive further spread compression in peripheral sovereign bonds. Recent stability in emerging-market asset markets suggests better data for developing countries could be on the horizon. Our outlook for credit, prepayment, and liquidity risks remains positive.
No bubble trouble; stocks are still reasonably priced. This credit cycle has unique characteristics that continue to make high-yield bonds attractive. Interest-rate volatility poses greater risk than higher rates themselves.
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.
If U.S. politics do not derail the recovery, pent-up demand can drive faster economic growth. Fixed-income outflows appear likely to continue, pushing rates higher.
Retirement planning should be based on an understanding of generating a lifetime income stream. Putnam’s Lifetime Income experience has demonstrated a positive influence on participant savings behavior. The U.S. Department of Labor’s goal of adding lifetime income illustrations on pension benefit statements advances the effort to help retirement plan participants make better savings decisions. Rules governing the distribution of this information should be flexible and open to innovation.
The portfolio’s pro-cyclical bias was beneficial as we continued to see a shift in favor of cyclical stocks over defensive sectors. Over the past few years, we have seen a significant expansion in the universe of companies with the ability and willingness to pay a dividend. Given the speed with which stocks have advanced and the introduction of increased interest-rate volatility, I would describe my outlook for equities as cautious for the short term.
The overriding factor influencing fixed-income performance was the market’s changing expectations as to when the Federal Reserve would begin tapering its quantitative easing program. The fund’s mortgage prepayment strategies, most notably our holdings of collateralized mortgage obligations, detracted from performance before rebounding in June. Our interest-rate and yield-curve positioning aided performance during the quarter. Our near-term outlook calls for continued positive economic growth and a potentially range-bound interest-rate environment.
While U.S. stocks finished the quarter with positive results, a range of global assets lost ground as bond yields jumped and commodity prices fell. The portfolio’s emphasis on U.S. equities and an underweight to interest rate risk, while helpful, did not offset declines across a range of global investments. The fund continues to pursue a flexible balance of risk exposures.
The global investment landscape was disrupted by rising bond yields, as investors contemplated a scaling back of the U.S. Federal Reserve’s bond-buying program. Within fixed income, our mortgage prepayment strategies detracted from performance but rebounded in June, while our term-structure positioning and holdings of commercial mortgage-backed securities aided results. Stock selection within directional strategies and currency positioning in non-directional strategies hampered returns in the 500 Fund and 700 Fund. We have a generally positive outlook for global economic growth and began to modestly increase the funds’ risk positioning in U.S. equities and global fixed income as the quarter concluded.
Five years after the worst economic crisis of our lifetimes, we are still feeling the after-shocks around the world.
Our recent financial past seems to herald one certainty for our collective
financial future: The investment world we grew up with has changed utterly.
Conventional wisdoms shaped by decades of high-return investing — first in equities from 1982 to 2000, then in fixed income markets over most of this century — need to be reexamined, revised, or even scrapped.
1. PUTNAM INVESTMENTS | putnam.com
Key takeaways
•Municipal bond prices moved lower during the second quarter, as fears about the
Federal Reserve tapering its stimulus program rattled the financial markets.
•While a handful of states still face some budget pressure for the remainder of their
2013 fiscal year, 45 states reported that they are likely to meet or exceed their
revenue projections for fiscal year 2013.
•Interest-rate volatility and the longer-term prospect of higher rates have
reinforced our bias toward a more limited duration stance.
•We continue to overweight essential-service revenue bonds, as well as the A-rated
and BBB-rated segments of the market.
•Our outlook calls for defaults to remain low and continued gradual economic
recovery.
Economic growth, interest-rate volatility, and federal budget cuts
created a complex environment during the second quarter. How did
the municipal bond market perform?
Heightened uncertainty on many fronts contributed to a mixed picture for the
municipal bond market. During April, the municipal bond market followed the
Treasury market to some extent, and benefited as rates moved lower and prices
moved higher. However, in a notable sell-off from May into June, those gains were
erased for the municipal market along with most fixed-income asset classes.
Continued improvement in the U.S. economy raised concerns about the Federal
Reserve paring back its stimulative bond-buying program, known as quantita-
tive easing [QE]. Consequently, interest rates rose sharply, with the yield on the
10-year Treasury bond soaring close to 100 basis points, or a full percentage point,
since the beginning of May.
In June, technical pressures in the municipal market compounded the sell-off.
Faced with the prospect of higher interest rates, many retail investors sold their
municipal bond investments. Consequently, municipal bond funds experienced
outflows that put further downward pressure on this asset class. On a positive
note, with investor fears subsiding by period-end, June 27 marked one of the
biggest one-day rallies in long-term municipal bonds since October 2008.
Q2 | 2013 » Putnam municipal bond funds Q&A
Rising bond yields
outweighed progress in
state finances, tax clarity
Portfolio Managers
Thalia Meehan, CFA
(industry since 1983)
Paul M. Drury, CFA
(industry since 1989)
Susan A. McCormack, CFA
(industry since 1986)
2. Q2 2013 | Rising bond yields outweighed progress in state finances, tax clarity
PUTNAM INVESTMENTS | putnam.com 2
Despite volatility in the second quarter, we continue
to see some encouraging trends across the municipal
bond market. Refinancing activity has been high,
as many issuers are retiring higher-coupon bonds
whenever possible and replacing them with lower-
yielding debt. While this trend makes it difficult to add
higher-yielding securities to the portfolio, refinancing
activity has simultaneously helped buoy prices and
demand — seasonal weakness notwithstanding — and
this has been true particularly for more seasoned, or
mature, bonds with coupons above today’s prevailing
rates. In addition, increased clarity on tax rates, at least
for the near future, has had a positive influence on
the market.
Why did the markets react so strongly to the
Fed’s statements?
In early May, the Fed released a statement announcing
that the central bank might consider reducing the
amount of Treasuries and mortgage debt that it buys
as part of its bond-buying program. This monetary
stimulus program was designed to hold interest
rates low to encourage employment and boost
economic growth. However, the announcement,
which also included a more upbeat assessment of
the economy by the Fed, drove interest rates higher
in anticipation of the Fed winding down the asset
purchases. Initially, the municipal bond market
withstood the rise in Treasury rates, but eventually
municipal bond investors became nervous, and
municipal yields moved higher as prices declined.
More recently, at the June 19 Federal Open Market
Committee meeting, Chairman Bernanke’s comments
clarified that if the optimistic view of the economy’s
progress proves to be correct, then a “tapering” of
bond purchases may begin somewhat sooner than
had been widely expected. While the Chairman was
careful to stress that the Fed’s actions will be driven
by the progress made by the economy, his remarks
were widely seen as hawkish and led to a further rise in
interest rates. Consequently, Treasury and municipal
bond rates continued their sell-off before fears began to
subside by quarter-end.
How did sequestration and related legislation
impact the municipal bond market?
On March 1, 2013, the federal budget sequestration
went into effect as part of January’s American Taxpayer
Relief Act. While the political rhetoric associated with
those cuts often has painted them as catastrophic, we
believe any fallout for most states will be fairly benign.
In our view, the cuts certainly won’t be beneficial for
states and local communities, but their impact will be
staggered over time. Thus, while we believe widespread
negative effects are unlikely, isolated budget or insol-
vency issues may create some headline risk. Sectors and
localities that benefit most from federal support and
areas that are heavily reliant on defense spending are
the most vulnerable, in our opinion. But at this point, it is
difficult to quantify exactly how sequestration will affect
states’ finances. The ultimate impact will depend on
how well these states have prepared and budgeted for
the sequestration cuts.
Outside of the sequestration issue, how are
states’ finances faring today?
Across the nation, states continue to make slow but
steady progress as they emerge from the Great Reces-
sion. While a handful of states still face some budget
pressure for the remainder of their 2013 fiscal year, 45
states reported that they are likely to meet or exceed
their revenue projections for fiscal year 2013, according
to the National Conference of State Legislatures. While
we believe this is an encouraging trend, challenges
remain at the local level given federal deficit reduction
and the ensuing cutbacks to the states. Many states
have lowered expenses by reducing their financial
support to cities and counties. Should the economy
begin to slow, this reduced spending would almost
certainly negatively affect municipal finances, in our
opinion. However, 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.
3. Q2 2013 | Rising bond yields outweighed progress in state finances, tax clarity
PUTNAM INVESTMENTS | putnam.com 3
It is important to keep in mind that general obligation
bonds, which are backed by the general credit and
taxing power of state and local municipalities, compose
approximately one third of the overall municipal
market, while two thirds are revenue bonds. Generally
speaking, we feel that revenue credits, which are
typically issued by state and local governments to
finance a specific revenue-generating project, are
faring well. Among revenue bonds, we continue to see
opportunities in sectors such as higher education, utility,
and health-care bonds.
How would you describe the general health
of the municipal bond market?
For calendar year 2012, bankruptcy filings represented
approximately 0.12% of the $3.7 trillion municipal
bond market. This default rate is in line with historical
averages, and we do not believe defaults will increase
meaningfully in the near future. We do expect to see
occasional isolated incidents of insolvency, however,
which can create headline risk. For example, in Michigan
a fiscal emergency was recently declared in Detroit,
which has been in financial distress for some time now,
and Puerto Rico was downgraded by Moody’s and
Standard & Poor’s. The government of Puerto Rico
has since put in proposals for pension reform in an
attempt to mend its credit profile. We are also closely
monitoring the outcome of the bankruptcy proceedings
in Stockton, California. That city filed for bankruptcy
protection last summer, and the eventual outcome of
the legal proceedings, with bondholders on one side
and pension funds on the other, may set a precedent
in the market, and could impact how other distressed
cities negotiate with creditors.
How did you position the funds during
the quarter?
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, the
A-rated and BBB-rated segments of the curve continue
to offer attractive relative value opportunities, in our
analysis. In terms of maturities, we find 10 to 20 years
to be the optimal part of the yield curve in today’s envi-
ronment. We continue to have a favorable outlook and
have overweighted investments relative to the funds’
benchmark in several sectors of the municipal bond
market, including continuing-care retirement communi-
ties, utilities, and higher education. Generally speaking,
the supply/demand picture becomes more favorable
in the summer months when reinvestment demand is
typically the highest of the year — thereby providing
support for municipal bond prices. That said, other
factors such as interest rates and the direction of the
economy have and could continue to influence market
activity. If we see a technical imbalance, we believe that
our positioning should allow us to take advantage of any
dislocations in the market.
What is your outlook?
We continue to have a constructive outlook for munic-
ipal bonds, though we believe that returns in 2013 will be
less about price appreciation and more about coupon
income in the tax-exempt market. While the spreads
are much narrower than they were at their peak, they
remain attractive within certain credit-quality areas,
in our opinion. Although they softened somewhat at
the end of the period, technical factors in the market —
specifically, continued refunding activity and stable
investor demand — generally have remained supportive
in recent months. While investors now have more
near-term certainty on tax rates for 2013, many issues
remain unresolved, including federal budget sequestra-
tion, the debt ceiling, and the potential for broader tax
reform later this year, all of which could affect the value
of municipal bonds. As always, we are monitoring the
situation closely and positioning the funds accordingly,
based on our analysis.
4. Q2 2013 | Rising bond yields outweighed progress in state finances, tax clarity
The views and opinions expressed here are those of the portfolio managers as of June 30, 2013, are subject to change
with market conditions, and are not meant as investment advice.
Consider these risks before investing: Capital gains, if any, are taxed at the federal and, in most cases, state levels.
For some investors, investment income may be subject to the federal alternative minimum tax. Income from federally
tax-exempt funds may be subject to state and local taxes. Bond investments are subject to interest-rate risk (the risk of
bond prices falling if interest rates rise) and credit risk (the risk of an issuer defaulting on interest or principal payments).
Interest-rate risk is greater for longer-term bonds, and credit risk is greater for below-investment-grade bonds. Unlike
bonds, funds that invest in bonds have fees and expenses. The fund may invest significantly in particular segments of
the tax-exempt debt market, making it more vulnerable to fluctuations in the values of the securities it holds than a more
broadly invested fund. Interest the fund receives might be taxable. Bond prices may fall or fail to rise over time for several
reasons, including general financial market conditions and factors related to a specific issuer or industry. You can lose
money by investing in the fund.
Request a prospectus or summary prospectus from your financial representative or by calling 1-800-225-1581.
The prospectus includes investment objectives, risks, fees, expenses, and other information that you should read
and consider carefully before investing.
Putnam Retail Management | One Post Office Square | Boston, MA 02109 | putnam.com EO117 281763 7/13
Annualized total return performance as of June 30, 2013
Putnam Tax Exempt Income Fund (PTAEX)
Class A shares
(inception
12/31/76)
Before
sales
charge
After
sales
charge
Barclays
Municipal
Bond Index
Last quarter -3.40% -7.26% -2.97%
1 year 0.12 -3.88 0.24
3 years 4.82 3.40 4.46
5 years 5.03 4.18 5.33
10 years 4.10 3.67 4.42
Life of fund 6.70 6.58 —
Total expense ratio: 0.75%
Putnam Tax-Free High Yield Fund (PTHAX)
Class A shares
(inception
9/20/93)
Before
sales
charge
After
sales
charge
Barclays
Municipal
Bond Index
Last quarter -3.97% -7.81% -2.97%
1 year 1.57 -2.49 0.24
3 years 6.33 4.89 4.46
5 years 5.62 4.76 5.33
10 years 4.83 4.40 4.42
Life of fund 6.20 6.04 6.92
Total expense ratio: 0.82%
Returns for periods less than one year are not annualized.
Current performance may be lower or higher than the quoted past performance, which cannot guarantee future results.
Share price, principal value, and return will vary, and you may have a gain or a loss when you sell your shares. Performance
of class A shares after sales charge assumes reinvestment of distributions and does not account for taxes. After-sales-
charge returns reflect a maximum 4.00% load. For purchases made after June 24, 2013, the 1% short-term trading fee, as
described in the fund's prospectus, no longer applies. For Putnam Tax-Free High Yield Fund, the life-of-fund performance
for class A shares is based on the historical performance of class B shares (inception 9/9/85), adjusted for the applicable
sales charge. To obtain the most recent month-end performance, visit putnam.com. The funds’ expense ratios are based
on the most recent prospectus and are subject to change.
The Barclays Municipal Bond Index is an unmanaged index of long-term fixed-rate investment-grade tax-exempt bonds.
It is not possible to invest directly in an index.