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Putnam municipal bond funds Q&A Q3 2012

Putnam municipal bond funds Q&A Q3 2012

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Published by Putnam Investments
Municipal bonds continued to post gains in the third quarter, drawing in investors with attractive yields versus Treasuries. Supply and demand technicals have benefited municipal bonds thus far in 2012. The municipal market will likely be influenced by the fiscal cliff the closer we get to the election, and potentially beyond. We continue to overweight essential-service revenue bonds, and maintain our bias toward the A-rated and BBB-rated segments of the market.
Municipal bonds continued to post gains in the third quarter, drawing in investors with attractive yields versus Treasuries. Supply and demand technicals have benefited municipal bonds thus far in 2012. The municipal market will likely be influenced by the fiscal cliff the closer we get to the election, and potentially beyond. We continue to overweight essential-service revenue bonds, and maintain our bias toward the A-rated and BBB-rated segments of the market.

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Published by: Putnam Investments on Oct 22, 2012
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10/22/2012

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PUTNAM INVESTMENTS |
putnam.com
Key takeaways
            •
Municipalbondscontinuedtopostgainsinthethirdquarter,drawingininvestorswithattractiveyieldsversusTreasuries
            •
Supplyanddemandtechnicalshavebenetedmunicipalbondsthusarin
            •
Themunicipalmarketwilllikelybeinuencedbythescalclithecloserwegettotheelection,andpotentiallybeyond
            •
Wecontinuetooverweightessential-servicerevenuebonds,andmaintainourbiastowardtheA-ratedandBBB-ratedsegmentsothemarket
Municipal bonds continued their streak o solid gains in the thirdquarter. What was driving those returns?
MunicipalbondshavebenetedromtheactthattheyoerhigheryieldsthanTreasuries,butstillentailrelativelylowriskodeaultAsaresult,investorshaveockedtotheassetclass,pouringnearly$billionintothemunicipalbondmarketin,whichareamongthehighesttotalsinthepastyearsClearly,demandhasbeenverystrongSupply,meanwhile,hasbeenrelativelylimited,especiallywithinhigh-yieldmunicipalbondsInand,non-ratedbondswerebeingissuedatarateo$billionto$billionayear,ourresearchshowsToday,newissuanceisroughly$billionthroughSeptemberothisyearOntheinvestment-gradeside,asignicantmajorityoissuanceinhasbeenorthepurposeorenancingexistingdebtatlowerinterestratesThisinequitybetweensupplyanddemandhashelpedkeepupwardpressureonpricesAtthesametime,municipalbondvaluationshavecontinuedtoappearattractiverelativetocorporateandTreasurydebt,particularlyonatax-adjustedbasisValuations,ocourse,areonlyoneactoramongmany,butithasbeenoneotheactorsdrawinginvestorsintothemarket
Q3
|
2012 » Putnam municipal bond unds Q&A
Municipal bonds continuewinning streak, though policyrisks loom at year-end
Portolio management team
ThaliaMeehanleadsateamoveteraninvestorsresponsibleorday-to-daymanagementotheund
Thalia Meehan, CFA
(industry since 1983)
Paul M. Drury, CFA
(industry since 1989)
Susan A. McCormack, CFA
(industry since 1986)
 
Q3 2012 |
Municipal bonds continue winning streak, though policy risks loom at year-end
PUTNAM INVESTMENTS |
putnam.com
There’s been a lot o discussion aboutthe looming “scal clif,” reerring to taxincreases and spending cuts slated to beginon January 1, 2013. Can you give us an updateon the situation?
ThecloserwegettotheNovemberelections,themoreattentionweimaginethescalcliwillgetObviously,investorswouldpreertheissuebeaddressedsoonerratherthanlater,butit’sanyone’sguessastowhetherthelame-ducksessionoCongresswillputtogetherlegislationbeoreJanuaryThere’scertainlyincentivetotakeuptheissuesoonTheCongressionalBudgetOfceestimatesthatthecombinedeectothespendingcutsandtaxeshikeswouldnegativelyimpactGDPThemarketishopeulthatanextensiondealcanbereachedatertheelection,andthatalonger-termsolutiontodebtlevelstaxratescanbetakenupintherstparto
How concerned are you about the potentialor higher interest rates in the municipalbond market?
Webelievethatgivenallthat’sgoingonatthemacroeco-nomicleveltoday,thelikelihoodohigherinterestratesisrelativelylowThereisstillquiteabitouncertaintysurroundingthesovereigndebtsituationinEurope,andintheUnitedStatestheFederalReserverecentlyannouncedathirdroundoquantitativeeasing,or“QE”Inconjunctionwiththenewroundobondbuying,theFedreiterateditsintentiontokeepshort-termratesatnear-zerolevelsintoSoultimately,thereareanumberoactorsapplyingdownwardpressureoninterestratesthroughcentralbankeasingpoliciesThatsaid,thereareanumberostrategieswecanemploytoreducetheinterest-ratesensitivityotheportoliosshouldwebelieveconditionswarrantamoredeensivestanceAnd,ocourse,notallbondsarecreatedequalwhenitcomestointerest-ratesensitivityTolessentheunds’sensitivitytoratemovements,wecanreduceourexposuretolong-datedbondsandbuyintermediate-termbonds,ormoveromhigher-ratedpositionstosomewhathigher-yieldingpositions,whichtendtobemoredeensiveinarising-rateenvironment
How are you positioning the portolios rom asector and credit quality perspective?
Forsometimenow,we’vebeenocusingourinvest-mentsonessentialservicerevenuebonds,whichwebelievearemoreinsulatedromscalpressuresatthemunicipallevelWhiletaxreceiptshavebeengraduallyimprovingalongwiththeslowgrowthwe’reseeinginthebroadereconomy,webelievelocaldebt—andparticu-larlylocalgeneralobligationdebt—ismorevulnerabletoanybumpsontheroadFromacreditqualityperspective,webelievetheA-ratedandBBB-ratedsegmentsothemarket,evenatermorethanthreeyearsospreadtightening,stillmayhaveroomtogoandcontinuetoappearattractivelyvaluedcomparedwithothersegmentsothemunicipalbondmarket
What is your outlook or the remainder o 2012and into 2013?
Wecontinuetobeoptimisticontheoutlookormunic-ipalbonds,givenstrongmarkettechnicals,andmaintainouroverweighttoessentialservicerevenuebondsWhilespreadsarewellotheirwides,theyremainattractiveSupplymayexperienceaseasonalincreaseinOctoberandNovember,butidemandorbondsremainsstrong—aswebelieveitwillgivenrecentcashowsintotheassetclass—thenDecemberandJanuarymayonceagainseeincreasedreinvestmentdemandLikemostassetclasses,themunicipalmarketwilllikelybemoreheavilyinuencedbythescalclithecloserwegettotheelection,particularlyasitappearsunlikelytobeaddressedbeoreNovemberIncreasingly,investorshavebeenlookingtoWashington,DCorcluesaboutapotentialshort-termextensionotaxrates,theutureoslatedsequestration,thepossibleneedtoraisethedebtceiling,andthepotentialorbroadertaxreorminAllotheseactorscouldimpactthevalueomunicipalbonds’taxexemption,theavailabilityobonds,andthetranseroederaldollarstostateandlocalmunicipalities,andthereorecreditqualityingeneralAsalways,wearemonitoringthepoliticalsituationclosely,andbelievethatgiventheless-than-certainenvironmentgoingorward,ourundsarewellpositionedorhelpinginvestorspursuediversetax-reeincomeopportunities

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