Where are rates headed next?

Historically, when rates rise, they have tended to rise sharply
Changes in the federal funds rate
8.00%

Investor Education

E ective federal funds rate

10-year Treasury yield

7.00

6.00

+4.25% in 25 months

There have been three periods of tightening monetary policy in the past 20 years, during which short-term rates rose by an average of 3% — most recently, by more than 4%.

5.00

4.00

+1.75% in 12 months

3.00

+3.00% in 13 months

2.00

1.00

0.00 1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Source: United States Federal Reserve, as of 12/31/11.

The federal funds rate is a short-term rate objective of the Federal Reserve Board. The actual federal funds rate is the interest rate at which depository institutions lend balances at the Federal Reserve to other depository institutions overnight. The real rate changes daily, but is usually close to the target rate desired by the Federal Reserve.

Why duration matters
Rising rates can lead to negative total returns
Bond prices and interest rates generally move in opposite directions — when rates rise, the value of existing bonds decline. The degree of a bond’s sensitivity to those interestrate changes is measured by duration. For every 1% change in interest rates, a bond’s price is expected to move 1% in the opposite direction per year of duration. In other words, the higher a bond’s duration, the more sensitive it is to interest-rate movements.
Duration 1 year 3 years 5 years 7 years

If rates rise 1%
Expected price change -1% -3% -5% -7%

If rates rise 2%
Expected price change -2% -6% -10% -14%

If rates rise 4%
Expected price change -4% -12% -20% -28%

Duration is one of four fixed-income risks we consider
At Putnam, we break down the risks of fixed-income investing into four major areas for analysis. Each Putnam income fund mixes these risks in different ways, to give investors a choice of funds to build a portfolio suited to their goals and risk profile
Duration The sensitivity of a bond’s price to changes in interest rates, which causes bonds to lose value when rates increase. Credit The loss of principal or income when a bond issuer cannot make a payment or fulfill other obligations. Prepayment The early, unscheduled return of a bond’s principal, which may compel an investor to find a bond with less attractive features. Liquidity The lack of marketability of a security, which may cause an investor to concede a lower price in order to trade a bond.

For more information on how Putnam’s fixed-income funds can fit into a diversified portfolio, talk to your financial advisor or log on to putnam.com.

Consider these risks before investing: Funds that invest in bonds are subject to certain risks including interest-rate risk, credit risk, and inflation risk. As interest rates rise, the prices of bonds fall. Long-term bonds are more exposed to interest-rate risk than short-term bonds. Unlike bonds, bond funds have ongoing fees and expenses. Investors should carefully consider the investment objectives, risks, charges, and expenses of a fund before investing. For a prospectus or a summary prospectus containing this and other information for any Putnam fund or product, call your financial representative or call Putnam at 1-800-225-1581. Please read the prospectus carefully before investing.
Putnam Retail Management

Putnam Investments | One Post Office Square | Boston, MA 02109 | putnam.com

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