7/31/2019 Muni rally may continue, but must navigate policy risks

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PUTNAM INVESTMENTS | putnam.com

Key takeaways

            •Themunicipalbondmarketcontinueditsstreakosolidreturns,andmaystilloer

thepotentialoradditionalspreadtighteningversusTreasuries

            •Highre-undingandrenancingactivityhaslimitedthenetsupplyinthemarket,a

positiveormunicipalbonds

            •Theprimaryriskstoinvestorscontinuetobethoserelatedtoederalpolicyand

potentialchangestotaxstructuresorplanstoreducethedecit

            •Theundscontinuetobeunderweightlocalgeneralobligationbondsinavoro

essential-servicerevenuebonds,andmaintaintheirbiastowardtheA-ratedand

BBB-ratedsegmentsothemarket

Municipal bonds continued to post solid gains in the second quarter

What was driving those returns?

Forseveralquartersnow,themunicipalbondmarkethasbenetedromthe

investingpublic’srealizationthatstatesandmunicipalitiesdidn’trepresentthekind

obroad,systemicrisksthatthemediasuggestedalittlemorethanmonthsago

Tobesure,therearealwaysspeciccreditrisksinthemarket,butoverthepastyear,

municipalbondsingeneralhavebenetedromareturnoinvestors’riskappetites

asdoomsdayscenariosinthemarketcontinuetolookmoreandmoreunlikely

Againstthatbackdrop,webelievetwomainactorshavebeendrivingthereturns

ormunicipalbondscashowsandthecompositiononewissuanceDemand

hasremainedstrong,withinvestorsmovingabout$billionintomunicipalbond

undsthisyearMeanwhileonthesupplyside,alotoissuershavebeentaking

advantageotoday’slowinterestratesbyre-undingorrenancingexistingdebt,

andtheresultisewermunicipalbondsoutstanding,ornegativenetsupply

Q2 | 2012 » Q&A

Muni rally may continue, but

must navigate policy risks

Portolio management team

ThaliaMeehanleadsateamoveteran

investorsresponsibleorday-to-day

managementotheund

Thalia Meehan, CFA(industry since 1983)

Paul M. Drury, CFA(industry since 1989)

Susan A. McCormack, CFA(industry since 1986)

7/31/2019 Muni rally may continue, but must navigate policy risks

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Q2 2012 | Muni rally may continue, but must navigate policy risks

PUTNAM INVESTMENTS | putnam.com

There’s been a lot o discussion about the

“scal clif” looming in January, reerring to

the slated tax increases and spending cuts.

How likely do you believe it is that those

changes will be implemented, and what efect

might that have on the municipal bond market?

Theso-calledscalcliisgettingalotoattentioninthe

mediaatthemoment,andorgoodreasonTheesti-

matesweollowpegtheimpactonGDPothehigher

taxesanddecreasedgovernmentspendingthatmake

upthe“cli”atanywhererom-to-,andwiththe

USeconomyonlygrowingatarateoaboutayear,

thatobviouslywouldbeverydetrimentalLawmakers

arekeenlyawareotheissues,andourbelieisthat

Congresswillactsometimebeoretheendotheyear,

butprobablynotuntilatertheelectionsTheissuesare

highlypoliticized,butthetiminginaddressingthem

isalsodependentuponwhenthecurrentdebtceiling

limitsarehit

How are state nances aring today?

We’vedenitelyseenimprovementacrosstheboard

instates’nancesTheNationalConerenceoState

Legislaturesrecentlyreportedthatorthersttime

since,morethanhalostatesareprojectedto

nishtheirscalyearswithpositivebalances,whichis

certainlyanencouragingtrendMorebroadlyonthe

topicocreditquality,throughMay,deaultstotaled

onlyabout$billion,whichisinlinewithhistorical

averagesand,moreimportantly,representsjustatiny

ractionothe$trillionmunicipalbondmarket

Thatsaid,therecontinuetobesomestressesatthelocal

level;oneothewaysthatmanystateshavelowered

expenseshasbeentoreducetheirnancialsupportat

thelocallevelAndmoreover,shouldtheeconomybegin

todecelerateandgrowthweretostall,thatwouldnega-tivelyimpactstatenances,sowe’retakingasomewhat

cautiousviewontheoutlookorstaterevenuesoverall

Asarasmunicipalbondinvestorsareconcerned,

themarketseemstorespondpositivelywhenevera

governorandlegislatureseektoenactchangestobegin

toaddressbudgetimbalances,asincrementalasthose

changesmaybeMoreconcerningtoinvestorsiswhen

statesailtoaddresslonger-termissuesatall,whichwe

believeonlyservestodelaytheinevitable

How are you positioning the portolios rom a

sector and credit quality perspective?

We’vebeenocusingprimarilyonessentialservice

revenuebonds,whichwebelievearemoreinsulated

romscalpressuresatthemunicipallevelFromacredit

qualityperspective,webelievetheA-ratedandBBB-

ratedsegmentsothemarket,evenaterthreeandahal

yearsospreadtightening,stillmayhaveroomtogrow

andcontinuetoappearattractivelyvaluedcompared

withothersegments

Althoughwebelievethereareattractivelyvaluedoppor-

tunitiesincertainareasothemarket,wewouldcaution

investorstobecareultonotputtoomuchstockinany

onemetricovaluationMunicipalbondyieldscontinue

toappearattractiveonahistoricalbasisrelativetoboth

Treasuriesandcorporatedebt,butthoseratiosareonly

onetoolinthetoolboxWebelievethisisoneothemain

benetsoactivemanagementOurteamisableto

perormextensiveresearchandanalysisonthesecuri-

tiesweaddtoourportolios,usingmultiplepointso

comparisonintryingtoassessabond’sairvalue,atask

thatcanotenbeconsiderablymoredifcultorinves-

torsbuyingindividualbonds

What is your outlook or the remainder o 2012?

Wecontinuetobecautiouslyoptimisticontheoutlook

ormunicipaldebt,butthereareanumberounresolved

issuesthatcouldimpactthemarketThesovereign

debtcrisisinEuropeandthepresidentialelectioninthe

UnitedStatescouldaectinterestratesbroadly,and

thatinturnwouldaectthemunicipalbondmarket

Thekeyrisksweseeacinginvestorstodayaremore

tiedtopolicydecisionsthantoundamentalsinthe

marketUnsettledissuesintheeurozone,pendingtax

hikes,sequestration,andtheUSdecitareallpotential

headwindstothemunicipalbondmarketAsalways,we

aremonitoringallotheseactorsclosely,andbelieve

thatgiventheuncertainenvironmentgoingorward,our

undsarewellpositionedorhelpinginvestorspursue

diversetax-reeincomeopportunities

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Q2 2012 | Muni rally may continue, but must navigate policy risks

TheviewsandopinionsexpressedherearethoseotheportoliomanagersasoJune,,aresubjecttochangewith

marketconditions,andarenotmeantasinvestmentadvice

Consider these risks beore investing: Capitalgains,iany,aretaxableorederaland,inmostcases,statepurposesFor

someinvestors,investmentincomemaybesubjecttotheederalalternativeminimumtaxIncomeromederallyexempt

undsmaybesubjecttostateandlocaltaxes

Fundsthatinvestinbondsaresubjecttocertainrisksincludinginterest-raterisk,creditrisk,andinationriskAsinterest

ratesrise,thepricesobondsallLong-termbondsaremoreexposedtointerest-rateriskthanshort-termbondsUnlike

bonds,undsthatinvestinbondshaveongoingeesandexpensesLower-ratedbondsmayoerhigheryieldsinreturnor

morerisk

Request a prospectus or summary prospectus rom your nancial representative or by calling 1-800-225-1581.

The prospectus includes investment objectives, risks, ees, expenses, and other inormation that you should read

and consider careully beore investing.

Putnam Retail Management | One Post Office Square | Boston, MA 02109 | putnam.com  EO117 275100 7/12

Annualized total return perormance as o June 30, 2012

Putnam Tax Exempt Income Fund (PTAEX)

Class A shares

(inception

12/31/76)

Beore

sales

charge

Ater

sales

charge

Barclays

Municipal Bond

Index

Last quarter 2.39% -1.73% 1.88%

1 year 11.60 7.08 9.90

3 years 8.73 7.29 7.62

5 years 5.43 4.58 5.95

10 years 4.77 4.33 5.28

Lie o und 6.89 6.77 —

Total expense ratio: 0.75%

Putnam Tax-Free High Yield Fund (PTHAX)

Class A shares

(inception

9/20/93)

Beore

sales

charge

Ater

sales

charge

Barclays

Municipal Bond

Index

Last quarter 3.13% -1.00% 1.88%

1 year 14.41 9.81 9.90

3 years 12.60 11.07 7.62

5 years 4.94 4.10 5.95

10 years 5.06 4.62 5.28

Lie o und 6.37 6.21 7.12

Total expense ratio: 0.80%

Quarterlyreturnsarecumulative

Current perormance may be lower or higher than the quoted past perormance, which cannot guarantee uture results. Share price, principal

value, and return will vary, and you may have a gain or a loss when you sell your shares. Perormance o class A shares ater sales charge assumes

reinvestment o distributions and does not account or taxes. Ater-sales-charge returns refect a maximum 4.00% load. A 1% short-term trading

ee may apply. For Putnam Tax-Free High Yield Fund, the lie-o-und perormance or class A shares is based on the historical perormance o

class B shares (inception: 9/9/85), adjusted or the applicable sales charge. To obtain the most recent month-end perormance, visit putnam.com. 

The unds’ expense ratios are based on the most recent prospectus and are subject to change.

TheBarclaysMunicipalBondIndexisanunmanagedindexolong-termxed-rateinvestment-gradetax-exemptbondsItisnotpossibletoinvest

directlyinanindexPastperormanceisnotindicativeoutureresults