TAILIEUCHUNG - Evolving municipal bond market makes compelling case for active management

Most of the sovereign bank debt likely to be exchanged, however, is held by larger German, French and Swiss banks with the capability (if not necessarily the desire) to take the write-offs required. The overhang of such future losses affects the entire European banking system at a time when it too is being restructured. The ECB, and the European central banks need to identify those banks that are impaired by excessive sovereign holdings and assist them in recapitalization – the sooner the better – but they should also push the larger, stronger banks to accept the exchange offers in the interest of bank transparency and restructuring as. | A world of investing Putnam INVESTMENTS February 2012 Putnam Perspective Evolving municipal bond market makes compelling case for active management Thalia Meehan CFA Portfolio Manager Paul M. Drury CFA Portfolio Manager Susan A. McCormack CFA Portfolio Manager Municipal bonds remain strategically important investments with significant tax advantages and generally low correlations to other asset classes over time. The near elimination of bond insurance has dramatically changed the municipal ratings landscape. Municipal bond fundamentals are helped today by low defaults and attractive spreads over Treasuries. Actively managed funds driven by fundamental research can help add broad diversification and mitigate risk. The classic strategic reasons to own municipal bonds still hold true They generally have low correlations to other asset classes and offer a meaningful tax advantage to investors features that are unlikely to change in the near term. However the municipal bond market has experienced a significant shift over the past several years through the virtual demise of municipal bond insurance and the stress of highly constrained federal and state budgets. This paper will examine how these changes in the municipal bond market have had an impact on the evaluation of municipal securities whether it makes sense to invest in municipal bonds today and how investors might need to change the way they implement their investment strategies as a result. Figure 1. Municipal bonds are not highly correlated with other asset classes Municipal bond correlations versus other assets 1 31 92-12 31 11 Not FDIC insured May lose value No bank guarantee Sources Barclays Capital Bond indices Standard Poor s. Stacking up yesterday versus today In comparing the municipal bond market from 10 years ago with today s market many characteristics remain consistent. A decade ago the top five state issuers were California Florida Illinois New York and Texas and represented roughly 50 of the market

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