Putnam Global Income Trust Q&A Q2 2013
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In Q2 2013, global bond markets experienced declines as investors reacted to the prospect of reduced Federal Reserve bond buying, which was announced by Chairman Bernanke amid improving U.S. economic data. The Putnam Global Income Trust benefitted from an overweight in the strengthening U.S. dollar and allocations in high-yield and commercial mortgage-backed securities, despite some negative impacts from mortgage prepayment strategies. Looking ahead, the fund managers maintain a positive outlook on U.S. economic recovery and are focusing on opportunities in peripheral European bonds and other spread sectors.
![PUTNAM INVESTMENTS | putnam.com
Q2 | 2013 » Putnam Global Income Trust Q&A
Global bond markets decline
as investors deliberate the
impact of reduced Federal
Reserve bond buying
D. William Kohli
Co-Head of Fixed Income, Portfolio Manager
Additional Portfolio Managers
Kevin F. Murphy
(industry since 1988)
Michael V. Salm
(industry since 1989)
Michael J. Atkin
(Industry since 1988)
Not shown
Key takeaways
•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.
What was the global bond market environment like in the second
quarter of 2013?
Bond markets around the world were influenced by improving U.S. economic
data, which sparked debate among investors about when the Federal Reserve
would begin to scale back its stimulative bond-buying program. These concerns
intensified in June, when Fed Chairman Ben Bernanke announced that the central
bank could begin reducing its stimulus program later in 2013, and end it by mid
2014, sooner than investors expected. Spread sectors — meaning sectors that
trade at a yield premium to U.S. Treasuries — which had been buoyed by the
massive liquidity created by the Fed’s asset purchases, sold off, with emerging-
market [EM] bonds getting hit particularly hard. Global government bonds also
fell, although not to the same degree as sectors entailing greater risk.
What prompted Chairman Bernanke’s announcement?
U.S. economic data has been slowly improving, including signs that employment
is picking up, while inflation has continued to hover below the Fed’s target of
two-and-a-half-percent. I think it’s important to note, however, that the central
bank hasn’t taken direct action yet. After Chairman Bernanke’s comments,
several other Fed officials tried to reassure the market that the tapering of bond
purchases remained data dependent and that the cutback in purchases doesn’t
mean that a policy shift to raising rates would be forthcoming anytime soon. In
our view, the debate about when the Fed will begin curtailing quantitative easing
is healthy because it allows investors to think about what the financial markets
will look like when major sectors are no longer being propped up by massive
government intervention.](https://image.slidesharecdn.com/281761rel2q13gitcomment-130716131703-phpapp01/85/Putnam-Global-Income-Trust-Q-A-Q2-2013-1-320.jpg)
![Q2 2013 | Global bond markets decline as investors deliberate the impact of reduced Federal Reserve bond buying
PUTNAM INVESTMENTS | putnam.com 2
How did your currency strategy affect the
fund’s performance?
In early May, the U.S. dollar began to strengthen
versus other major currencies, so our substantial dollar
overweight versus the benchmark aided relative perfor-
mance. Underweight exposure to the Japanese yen also
provided a boost, as the yen weakened significantly
following the Bank of Japan’s announcement that it
would take a more aggressive approach to monetary
easing. By mid quarter, we had significantly reduced the
fund’s currency risk by cutting back most of our active
foreign currency positions, particularly in emerging
markets. We felt this was prudent in light of heightened
risk in the marketplace.
How did the fund’s mortgage-related
strategies work out?
Our mortgage prepayment strategies hurt the fund’s
results overall for the quarter. As the quarter began,
given the uncertainty about Fed policy, the pace of
home refinancing, and that interest rates are still at low
levels, our holdings of collateralized mortgage obliga-
tions [CMOs] significantly underperformed. However,
the sector rebounded nicely in June, and we sought to
capitalize on CMOs’ improved relative value by boosting
the portfolio’s allocation. With the increase in interest
rates, interest-only [IO] CMOs did particularly well,
because higher rates led to slower prepayments of the
mortgages underlying the securities.
Conversely, our mortgage credit holdings — both
non-agency residential mortgage-backed securities
[RMBS] and commercial mortgage-backed securities
[CMBS] — helped performance, especially earlier in
the quarter, as investors took advantage of attractive
spreads and positive underlying fundamentals in the
sector. As the quarter progressed, we sought to reduce
risk by shifting the fund’s allocation from RMBS into
CMBS, which were performing better.
How did the fund’s allocation to corporate
credit influence performance?
Our holdings of investment-grade and high-yield
corporate bonds were slightly beneficial, as strong
performance in April was only partially offset by the
sell-off that occurred in May and June. Similar to EM
debt and non-agency RMBS, high-yield bonds were
hampered more by capital flows and market “techni-
cals” [that is, supply and demand dynamics] than any
breakdown in fundamental support. In fact, the funda-
mental backdrop for high-yield bonds remained solid;
issuers are in reasonably good financial shape and the
default rate remained low at quarter-end. Moreover,
high-yield bonds have historically tended to do well
during periods of moderate economic growth.
What is your outlook for the months ahead?
We believe the U.S. economic recovery is on track and
should continue at a moderate pace. Despite higher
mortgage rates, we believe the U.S. housing recovery
will continue. In our view, home sales are improving
because of stronger economic activity and better
consumer confidence, and not solely because of low
mortgage rates. Outside the United States, the global
environment appears to be relatively stable, except for
China, where weaker growth and high consumer debt
levels have created challenges for a government that is
trying to stimulate domestic demand.
Peripheral eurozone economies have performed
better than we anticipated, thanks to sharply lower
interest rates in those countries. Core European econo-
mies were somewhat weaker than we expected but,
near the end of the quarter, data from Germany, the
Netherlands, and Switzerland was encouraging.
As for interest rates, while we believe global rates are
likely to move higher over the medium to longer term,
we think the degree of increase during the quarter was
more than the current economic environment warrants.
Consequently, in order to tactically position the fund
to potentially benefit from any near-term fall in rates,
we modestly lengthened the portfolio’s duration by
quarter-end.
Where are you finding the most attractive
investment opportunities?
Following the liquidity-driven sell-off in various spread
sectors, we selectively added back CMBS and added
more modestly to high-yield bonds, seeking to benefit
from the improved relative value in these sectors. We
also increased our allocations in peripheral European
government bonds, specifically in Italy, Spain, and
Greece. In addition to the improved economic backdrop
in these countries, we think these bonds offer favorable
technical characteristics versus the bond markets in
many developing nations.](https://image.slidesharecdn.com/281761rel2q13gitcomment-130716131703-phpapp01/85/Putnam-Global-Income-Trust-Q-A-Q2-2013-2-320.jpg)
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- 1. PUTNAM INVESTMENTS | putnam.com Q2 | 2013 » Putnam Global Income Trust Q&A Global bond markets decline as investors deliberate the impact of reduced Federal Reserve bond buying D. William Kohli Co-Head of Fixed Income, Portfolio Manager Additional Portfolio Managers Kevin F. Murphy (industry since 1988) Michael V. Salm (industry since 1989) Michael J. Atkin (Industry since 1988) Not shown Key takeaways •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. What was the global bond market environment like in the second quarter of 2013? Bond markets around the world were influenced by improving U.S. economic data, which sparked debate among investors about when the Federal Reserve would begin to scale back its stimulative bond-buying program. These concerns intensified in June, when Fed Chairman Ben Bernanke announced that the central bank could begin reducing its stimulus program later in 2013, and end it by mid 2014, sooner than investors expected. Spread sectors — meaning sectors that trade at a yield premium to U.S. Treasuries — which had been buoyed by the massive liquidity created by the Fed’s asset purchases, sold off, with emerging- market [EM] bonds getting hit particularly hard. Global government bonds also fell, although not to the same degree as sectors entailing greater risk. What prompted Chairman Bernanke’s announcement? U.S. economic data has been slowly improving, including signs that employment is picking up, while inflation has continued to hover below the Fed’s target of two-and-a-half-percent. I think it’s important to note, however, that the central bank hasn’t taken direct action yet. After Chairman Bernanke’s comments, several other Fed officials tried to reassure the market that the tapering of bond purchases remained data dependent and that the cutback in purchases doesn’t mean that a policy shift to raising rates would be forthcoming anytime soon. In our view, the debate about when the Fed will begin curtailing quantitative easing is healthy because it allows investors to think about what the financial markets will look like when major sectors are no longer being propped up by massive government intervention.
- 2. Q2 2013 | Global bond markets decline as investors deliberate the impact of reduced Federal Reserve bond buying PUTNAM INVESTMENTS | putnam.com 2 How did your currency strategy affect the fund’s performance? In early May, the U.S. dollar began to strengthen versus other major currencies, so our substantial dollar overweight versus the benchmark aided relative perfor- mance. Underweight exposure to the Japanese yen also provided a boost, as the yen weakened significantly following the Bank of Japan’s announcement that it would take a more aggressive approach to monetary easing. By mid quarter, we had significantly reduced the fund’s currency risk by cutting back most of our active foreign currency positions, particularly in emerging markets. We felt this was prudent in light of heightened risk in the marketplace. How did the fund’s mortgage-related strategies work out? Our mortgage prepayment strategies hurt the fund’s results overall for the quarter. As the quarter began, given the uncertainty about Fed policy, the pace of home refinancing, and that interest rates are still at low levels, our holdings of collateralized mortgage obliga- tions [CMOs] significantly underperformed. However, the sector rebounded nicely in June, and we sought to capitalize on CMOs’ improved relative value by boosting the portfolio’s allocation. With the increase in interest rates, interest-only [IO] CMOs did particularly well, because higher rates led to slower prepayments of the mortgages underlying the securities. Conversely, our mortgage credit holdings — both non-agency residential mortgage-backed securities [RMBS] and commercial mortgage-backed securities [CMBS] — helped performance, especially earlier in the quarter, as investors took advantage of attractive spreads and positive underlying fundamentals in the sector. As the quarter progressed, we sought to reduce risk by shifting the fund’s allocation from RMBS into CMBS, which were performing better. How did the fund’s allocation to corporate credit influence performance? Our holdings of investment-grade and high-yield corporate bonds were slightly beneficial, as strong performance in April was only partially offset by the sell-off that occurred in May and June. Similar to EM debt and non-agency RMBS, high-yield bonds were hampered more by capital flows and market “techni- cals” [that is, supply and demand dynamics] than any breakdown in fundamental support. In fact, the funda- mental backdrop for high-yield bonds remained solid; issuers are in reasonably good financial shape and the default rate remained low at quarter-end. Moreover, high-yield bonds have historically tended to do well during periods of moderate economic growth. What is your outlook for the months ahead? We believe the U.S. economic recovery is on track and should continue at a moderate pace. Despite higher mortgage rates, we believe the U.S. housing recovery will continue. In our view, home sales are improving because of stronger economic activity and better consumer confidence, and not solely because of low mortgage rates. Outside the United States, the global environment appears to be relatively stable, except for China, where weaker growth and high consumer debt levels have created challenges for a government that is trying to stimulate domestic demand. Peripheral eurozone economies have performed better than we anticipated, thanks to sharply lower interest rates in those countries. Core European econo- mies were somewhat weaker than we expected but, near the end of the quarter, data from Germany, the Netherlands, and Switzerland was encouraging. As for interest rates, while we believe global rates are likely to move higher over the medium to longer term, we think the degree of increase during the quarter was more than the current economic environment warrants. Consequently, in order to tactically position the fund to potentially benefit from any near-term fall in rates, we modestly lengthened the portfolio’s duration by quarter-end. Where are you finding the most attractive investment opportunities? Following the liquidity-driven sell-off in various spread sectors, we selectively added back CMBS and added more modestly to high-yield bonds, seeking to benefit from the improved relative value in these sectors. We also increased our allocations in peripheral European government bonds, specifically in Italy, Spain, and Greece. In addition to the improved economic backdrop in these countries, we think these bonds offer favorable technical characteristics versus the bond markets in many developing nations.
- 3. Q2 2013 | Global bond markets decline as investors deliberate the impact of reduced Federal Reserve bond buying Putnam Retail Management Putnam Investments | One Post Office Square | Boston, MA 02109 | putnam.com EO135 281761 7/13 The views and opinions expressed 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. All performance and economic information is historical and is not indicative of future results. Consider these risks before investing: International investing involves currency, economic, and political risks. Emerging- market securities carry illiquidity and volatility risks. Lower-rated bonds may offer higher yields in return for more risk. Funds that invest in government securities are not guaranteed. Mortgage-backed securities are subject to prepayment risk and the risk that they may increase in value less when interest rates decline and decline in value more when interest rates rise. The fund invests in fewer issuers or concentrates its investments by region or sector, and involves more risk than a more broadly invested fund. The fund’s policy of concentrating on a limited group of industries and the fund’s non-diversified status, which means the fund may invest in fewer issuers, can increase the fund’s vulnerability to common economic forces and may result in greater losses and volatility. 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. Risks associated with derivatives include increased investment exposure (which may be considered leverage) and, in the case of over-the-counter instruments, the potential inability to terminate or sell derivatives positions and the potential failure of the other party to the instrument to meet its obligations. Unlike bonds, funds that invest in bonds have fees and expenses. 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 Global Income Trust (PGGIX) Annualized total return performance as of June 30, 2013 Class A shares (inception 6/1/87) Before sales charge After sales charge Barclays Global Aggregate Bond Index Last quarter -2.61% -6.50% -2.80% 1 year 3.30 -0.83 -2.18 3 years 5.34 3.92 3.55 5 years 6.74 5.87 3.68 10 years 6.10 5.67 4.79 Life of fund 7.11 6.94 — Total expense ratio: 1.10% Returns for periods of 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. The class A share performance shown assumes reinvestment of distributions and does not account for taxes. After-sales-charge returns reflect a maximum load of 4.00%. For a portion of the periods, the fund had expense limitations, without which returns would have been lower. To obtain the most recent month-end performance, visit putnam.com. Barclays Global Aggregate Bond Index is an unmanaged index of global investment-grade fixed-income securities. You cannot invest directly in an index.