Muni rally may continue, but must navigate policy risks
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Transcript of Muni rally may continue, but must navigate policy risks
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
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
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