Putnam
Intermediate
Government
Income
Trust
SEMIANNUAL REPORT
May 31, 1996
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* "Intermediate-term bond funds, with average maturities of less than 12
years, make sense for investors who aren't willing to bet on interest
rates."
-- Kiplinger's Personal Finance Magazine, May 1996
* "During this semiannual period, we saw solid evidence of how the dual-
sector strategy benefits this fund. As the U.S. bond market took a
downturn, we had the flexibility to invest more in foreign holdings --
reducing the impact of the domestic decline."
-- Neil Powers, Manager, Putnam Intermediate
Government Income Trust
CONTENTS
4 Report from Putnam Management
7 Fund performance summary
10 Portfolio holdings
13 Financial statements
From the Chairman
[GRAPHIC OMITTED: PHOTO GEORGE PUTMAN]
(copyright) Karsh, Ottawa
Dear Shareholder:
Putnam Intermediate Government Income Trust's ability to invest globally
proved its worth during the six months ended May 31, 1996, the first
half of the fund's current fiscal year. Coming off one of the strongest
rallies in recent years, the U.S. bond market stumbled during the
semiannual period as investors grew concerned that the still-vibrant
U.S. economy could touch off a spurt in inflation at home. Meanwhile,
rallies in the bond markets of several other countries both cushioned
the effects of the U.S. market's decline and created opportunities
abroad.
The significant changes that occurred in the world's governmental
securities markets during the period thus presented plenty of challenges
for your fund's management team. As the managers explain in detail in
the report that follows, they undertook some important strategy shifts
seeking both to preserve earlier gains and to position the fund for
opportunities that might emerge during the second half of fiscal 1996.
Respectfully yours,
/S/George Putnam
George Putnam
Chairman of the Trustees
July 17, 1996
Report from the Fund Managers
Neil J. Powers, lead manager
D. William Kohli
Mark J. Siegel
The first half of Putnam Intermediate Government Income Trust's fiscal
year was marked by significant change in U.S. fixed-income markets. This
past December, the U.S. bond market was at the height of one of the
strongest periods in its history. A declining inflation rate at home and
bond market rallies around the world had helped boost both sectors of
the fund's portfolio -- U.S. government securities and international
government securities.
In the ensuing six months, however, the domestic bond markets became
increasingly unsettled as interest rates rose dramatically. Beginning in
February, signs of economic strength emerged, investors became concerned
about increasing inflation, and as a result, the bond market weakened.
While your fund could not avoid some of the negative impact of these
developments, our dual-sector strategy proved quite beneficial. The
fund's ability to invest in international bond markets, particularly
higher-yielding European markets, provided a positive contribution to
performance and helped cushion the blow of the U.S declines.
* PORTFOLIO REFOCUSED ON MORTGAGE-BACKED SECURITIES
In the U.S. government sector of the portfolio, we shifted our strategy
from a focus on duration to an emphasis on maximizing yield. Throughout
fiscal 1995, the portfolio's relatively long duration boosted
performance as economic growth slowed and inflation remained relatively
stable. Duration is a measure of a portfolio's sensitivity to interest-
rate changes, and a longer duration can be beneficial during a period of
declining rates. However, in the rising interest-rate environment of the
past six months, we took steps to shorten duration. We sold a
significant portion of the fund's intermediate-term Treasury securities
in favor of mortgage-backed securities.
Early in the fiscal year, mortgage-backed holdings made up a relatively
small portion of the portfolio. We had reduced our position because the
increasing risk of prepayment activity had diminished their value.
Historically a declining interest-rate environment sparks increased
prepayment, as lower rates prompt homeowners to refinance their
mortgages. Prepayment can have a negative impact on the fund because the
prepaid principal must be reinvested at lower rates.
As the period progressed, however, we saw prices of mortgage-backed
securities decline significantly -- so much so that we believed the
market had mispriced prepayment assumptions and prices had fallen below
fair value. Taking advantage of what we saw as an opportunity, we more
than doubled the fund's weighting of current-coupon mortgage-backed
securities.
* INTERNATIONAL SECTOR PROVIDES NEEDED DIVERSIFICATION
At the close of fiscal 1995, we shifted approximately 5% of the fund's
U.S. government sector holdings into the international sector. This move
was based on our expectation of stronger performance from international
bond markets, many of which were beginning to price in economic
slowdowns -- a generally positive scenario for bond investments. As we
anticipated, the strength of these international holdings helped
mitigate losses in the U.S. government sector.
[GRAPHIC OMITTED: vertical bar chart PORTFOLIO ALLOCATION SHIFTS]
legend describes:
the first column of percentages are as of date 5/31/95,
the second column of percentages are as of date 11/30/95,
the third column of percentages are as of date 5/31/96
Foreign 24.7% (first column)
28.7% (second column)
25.6% (third column)
Treasuries 32.5% (first column)
32.5% (second column)
17.6% (third column)
Mortgage-Backed 39.6% (first column)
25.2% (second column)
47.4% (third column)
Footnote reads:
Chart illustrates allocation of foreign government securities, U.S.
Treasury securities, and mortgage-backed securities, based on net
assets.
At the time of the shift, our emphasis was on European government bonds
and, in particular, those in peripheral European markets, such as Spain
and Italy. More recently we began to reduce the fund's European holdings
as slower growth became fully priced into these markets and signs of
stronger growth emerged. This reduction may have been somewhat
premature, as it has not yet provided the performance boost we had
anticipated.
Another reason we made this reduction was to bring the international
sector of the portfolio closer to a neutral weighting, which meant
scaling back overweighted positions. We added to positions in Anglo
markets, such as Canada and Australia, and began investing in Japanese
bonds for the first time in nine months. Throughout April and May,
holdings in the higher-yielding European markets, although reduced,
continued to provide strong performance.
Our currency hedging strategies also proved beneficial. A hedge is
considered a sort of insurance policy designed to protect the fund from
adverse currency movements. When foreign currencies weaken or decline
compared with the U.S. dollar, the value of the fund's foreign holdings
can be diminished. By hedging these foreign currency holdings into U.S.
dollars, we are using the expected strength of the dollar to seek to
protect their value.
Such a strategy could prove detrimental, of course, if the U.S. dollar
should weaken against these other currencies. Throughout most of the
period, our hedges proved effective as several European currencies
declined in value against the dollar. In May, however, our hedging
strategy was a drag on performance and we began to reduce the hedges as
the momentum of the U.S. dollar slowed.
* AN OUTLOOK OF CAUTIOUS OPTIMISM
Our long-term outlook remains optimistic; we believe U.S. interest rates
will stabilize and global inflation will remain under control despite
some recent market concerns about an overheating economy. We realize,
however, that the market remains vulnerable to periods of volatility,
especially during this presidential election year. Accordingly we will
watch market conditions at home and abroad and make adjustments to the
portfolio -- seeking to capitalize on the fund's effective dual-sector
strategy.
The views expressed here are exclusively those of Putnam Management.
They are not meant as investment advice. Although the described holdings
were viewed favorably as of 5/31/96, there is no guarantee the fund will
continue to hold these securities in the future.
Performance summary
Putnam Intermediate Government Income Trust is designed for investors
seeking high current income and relative stability of net asset value
through a portfolio of U.S. government and foreign government securities
with limited maturities. Performance should always be considered in
light of a fund's investment strategy.
This section provides, at a glance, information about your fund's
performance. Total return shows how the value of the fund's shares
changed over time, assuming you held the shares through the entire
period and reinvested all distributions back into the fund. We show
total return in two ways: on a cumulative long-term basis and on average
how the fund might have grown each year over varying periods.
TOTAL RETURN FOR PERIODS ENDED 5/31/96
Market
NAV price
- ------------------------------------------------------------------------
6 months -0.55% -1.04%
- ------------------------------------------------------------------------
1 year 4.45 2.86
- ------------------------------------------------------------------------
5 years 45.84 30.66
Annual average 7.84 5.49
- ------------------------------------------------------------------------
Life (6/27/88) 91.64 57.98
Annual average 8.55 5.94
- ------------------------------------------------------------------------
COMPARATIVE INDEXES AND BENCHMARKS
Salomon Bros.
Lehman Bros. Lehman Bros. Non-U.S. Consumer
Govt. Intermed. Mortgage-Backed World Govt. Price
Bond Index Securities Index Bond Index Index
- ------------------------------------------------------------------------
6 months -0.04% 0.22% -1.22% 1.95%
- ------------------------------------------------------------------------
1 year 4.53 5.01 0.17 2.89
- ------------------------------------------------------------------------
5 years 41.43 43.36 64.53 15.49
Annual average 7.18 7.47 10.47 2.92
- ------------------------------------------------------------------------
Life of fund
(since 6/27/88) 85.24 97.04 104.15 32.71
Annual average 8.10 8.94 9.43 3.63
- ------------------------------------------------------------------------
Performance data represent past results, do not reflect future
performance, and will differ for each share class. They do not take into
account any adjustment for taxes payable on reinvested distributions.
Investment returns, net asset value, and market price will fluctuate so
that an investor's shares, when sold, may be worth more or less than
their original cost.
TOTAL RETURN FOR PERIODS ENDED 6/30/96
(most recent calendar quarter)
Market
NAV price
- ------------------------------------------------------------------------
6 months -1.74% -0.07%
- ------------------------------------------------------------------------
1 year 4.53 2.21
- ------------------------------------------------------------------------
5 years 47.18 27.83
Annual average 8.04 5.03
- ------------------------------------------------------------------------
Life (6/27/88) 92.34 57.98
Annual average 8.51 5.88
- ------------------------------------------------------------------------
Performance data represent past results, do not reflect future
performance, and will differ for each share class. They do not take into
account any adjustment for taxes payable on reinvested distributions.
Investment returns, net asset value, and market price will fluctuate so
that an investor's shares, when sold, may be worth more or less than
their original cost.
PRICE AND DISTRIBUTION INFORMATION
6 months ended 5/31/96
- ------------------------------------------------------------------------
Distributions (number) 6
- ------------------------------------------------------------------------
Income $0.30
- ------------------------------------------------------------------------
Share value: NAV Market price
- ------------------------------------------------------------------------
11/30/95 $8.70 $7.750
- ------------------------------------------------------------------------
5/31/96 8.32 7.375
- ------------------------------------------------------------------------
Current return (end of period) NAV Market price
- ------------------------------------------------------------------------
Current dividend rate1 7.21% 8.14%
- ------------------------------------------------------------------------
1 Income portion of most recent distribution, annualized and divided by
NAV at end of period.
TERMS AND DEFINITIONS
Net asset value (NAV) is the value of all your fund's assets, minus any
liabilities, divided by the number of outstanding shares.
Market price is the current trading price of one share of the fund.
Market prices are set by transactions between buyers and sellers on the
New York Stock Exchange.
COMPARATIVE BENCHMARKS
Lehman Brothers Government Intermediate Bond Index* is composed of all
bonds covered by the Lehman Brothers Government Bond Index+ with
maturities of 10 years or greater.
Lehman Brothers Mortgage-Backed Securities Index* reflects performance
of 15- and 30-year fixed-rate securities backed by mortgage pools of the
GNMA, FHLMC, and FNMA.
Salomon Brothers Non-U.S. World Government Bond Index* is an unmanaged
list of bonds issued by 10 countries.
Consumer Price Index (CPI) is a commonly used measure of inflation; it
does not represent an investment return.
* Securities indexes assume reinvestment of all distributions and
interest payments and do not take in account brokerage fees or taxes.
Securities in the fund do not match those in the indexes and performance
of the fund will differ. It is not possible to invest directly in an
index.
+ The Lehman Brothers Government Bond Index is an unmanaged list of
U.S. government and mortgage-backed securities.
<TABLE>
<CAPTION>
Portfolio of investments owned
May 31, 1996 (Unaudited)
<S> <C> <C> <C> <C>
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (66.5%) *
PRINCIPAL AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------------
$411,999 Federal Home Loan Mortgage Association 6 1/2s, September 1, 2002 $ 402,285
Federal National Mortgage Association
64,801,000 TBA, 8s, June 16, 2026 64,902,480
42,899,157 7 1/2s, with various due dates from June 1, 2025 to May 1, 2026 42,014,172
36,919,102 7s, with various due dates from November 1, 2023 to May 1, 2026 35,199,794
Government National Mortgage Association
56,288 8s, July 15, 2023 56,887
70,566,063 7 1/2s, with various due dates from May 15, 2024 to April 15, 2026 69,000,249
43,411,810 7s, with various due dates from January 15, 2024 to April 15, 2026 41,308,974
U.S. Treasury Bonds
15,000,000 12 3/8s, May 15, 2004 20,020,350
20,000,000 11 5/8s, November 15, 2004 26,040,600
8,600,000 10 3/4s, August 15, 2005 10,829,292
U.S. Treasury Notes
22,800,000 8 7/8s, November 15, 1998 24,086,148
25,000,000 8 1/8s, February 15, 1998 25,757,750
---------------
Total U.S. Government and Agency Obligations (cost $367,266,419) $359,618,981
FOREIGN GOVERNMENT BONDS AND NOTES (28.7%) *
PRINCIPAL AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------------
AUD $6,205,000 Australia (Government of) bonds 9s, 2004 $ 4,998,033
AUD 17,165,000 Australia (Government of) notes 8 3/4s, 2001 13,771,334
AUD 8,850,000 Australia (Government of) bonds 6.91s, 2002 7,488,852
CAD 32,735,000 Canada (Government of) bonds 7 1/2s, 2001 24,325,219
CAD 3,225,000 Canada (Government of) deb. 8 3/4s, 2005 2,521,372
DKK 31,305,000 Denmark (Government of) bonds 8s, 2003 5,619,733
DKK 22,640,000 Denmark (Government of) bonds 7s 2004 3,794,822
DEM 18,400,000 Germany (Republic of) bonds 7 3/8s, 2005 12,821,058
DEM 21,250,000 Germany (Republic of) bonds 6 7/8s, 2005 14,325,686
ITL 17,160,000,000 Italy (Government of) bonds 10 1/2s, 2005 11,770,203
ITL 9,000,000,000 Italy (Government of) deb. 10 1/2s, 2000 6,138,195
NZD 5,275,000 New Zealand Treasury bills zero %, 1996 3,477,335
ESP 756,400,000 Spain (Government of) bonds 12 1/4s, 2000 6,626,087
ESP 450,000,000 Spain (Government of) bonds 10s, 2005 3,663,198
GBP 13,908,000 United Kingdom Treasury bonds 9 3/4s, 2002 23,565,041
GBP 3,825,000 United Kingdom Treasury bonds 7 1/4s, 1998 5,980,627
GBP 2,830,000 United Kingdom Treasury notes 7s, 2001 4,259,028
---------------
Total Foreign Government Bonds and Notes (cost $154,555,309) $155,145,823
PURCHASED OPTIONS OUTSTANDING (0.2%) *
EXPIRATION DATE/
CONTRACT AMOUNTS STRIKE PRICE VALUE
- -------------------------------------------------------------------------------------------------------------------------
JPY $2,041,056,000 Japanese Government Bonds Futures Contracts (Call) July 96/JPY 117.50 $370,174
JPY 4,038,139,000 Japanese Government Bond (Call) July 96/JPY 118.22 405,794
USD 38,600,000 U.S. Dollars in Exchange for Deutschemarks June 96/DEM 1.54 100,360
---------------
Total Purchased Options Outstanding (cost $805,806) $876,328
SHORT-TERM INVESTMENTS (16.6%) *
PRINCIPAL AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------------
$34,000,000 Federal National Mortgage Association disc. notes 5.03s, June 6, 1996 $33,976,246
56,026,000 Interest in $530,273,000 repurchase agreement dated May 31, 1996
with Morgan Stanley & Co. Inc. due June 3, 1996 with respect to
various U.S. Treasury obligations-maturity value of $56,050,698
for an effective yield of 5.29% 56,034,233
---------------
Total Short-Term Investments (cost $90,010,479) $90,010,479
- -------------------------------------------------------------------------------------------------------------------------
Total Investments (cost $612,638,013) $605,651,611
- -------------------------------------------------------------------------------------------------------------------------
* Percentages indicated are based on net assets of $540,622,485.
*** The aggregate identified cost on a tax basis is $612,950,386, resulting in gross unrealized
deppreciation and depreciation of $731,434 and $8,030,209, respectively, or net
unrealized appreciation of $7,298,775.
(+++) TBA after the name of a security represent to be announced securities (See Note 1).
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Diversification of Foreign Bonds and Notes at May 31, 1996
(as a percentage of net assets)
<S> <C> <C> <C>
Australia 4.9% Italy 3.3%
Canada 5.0 New Zealand 0.6
Denmark 1.7 Spain 1.9
Germany 5.0 United Kingdom 6.3
- -----------------------------------------------------------------------------------------------------
<CAPTION>
Forward Currency Contracts to Buy at May 31, 1996
(Aggregate Face Value $172,089,986)
Unrealized
Aggregate Face Delivery Appreciation/
Market Value Value Date (Depreciation)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Danish Krone $ 5,116,784 $ 5,050,381 9/18/96 $ 66,403
Deutschemarks 79,358,758 78,654,940 9/18/96 703,818
French Franc 23,138,004 22,781,228 9/18/96 356,776
Italian Lira 5,212,880 5,188,009 9/18/96 24,871
Japanese Yen 54,217,177 54,681,443 9/18/96 (464,266)
Swedish Krona 5,830,701 5,733,985 9/18/96 96,716
- -----------------------------------------------------------------------------------------------------
$784,318
- -----------------------------------------------------------------------------------------------------
Forward Currency Contracts to Sell at May 31, 1996
(Aggregate face value $106,695,735) Unrealized
Market Aggregate Face Delivery Appreciation/
Value Value Date (Depreciation)
- -----------------------------------------------------------------------------------------------------
Australian Dollars $26,714,418 $26,647,255 9/18/96 $ (67,163)
British Pounds 17,702,187 17,260,976 9/18/96 (441,211)
Canadian Dollars 18,703,839 18,603,471 9/18/96 (100,368)
Danish Krone 9,052,643 9,005,045 9/18/96 (47,598)
Deutschemarks 15,682,813 15,444,097 9/18/96 (238,716)
Italian Lira 10,224,564 10,176,744 9/18/96 (47,820)
Japanese Yen 7,040,376 7,073,023 9/18/96 32,647
Spanish Peseta 2,165,140 2,153,850 9/18/96 (11,290)
Swedish Krona 337,308 331,274 9/18/96 (6,034)
- -----------------------------------------------------------------------------------------------------
$ (927,553)
- -----------------------------------------------------------------------------------------------------
<CAPTION>
Written Put Options on Foreign Currency Outstanding at May 31, 1996
(premium received $125,450)
Expiration Date/
Contract Amount Strike Price Value
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$ 38,600,000 U.S. Dollars in Exchange for Deutschemarks Jun. 96/DEM 1.565 $23,160
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
May 31, 1996 (Unaudited)
<S> <C>
Assets
- ----------------------------------------------------------------------------------------------------------
Investments in securities, at value (identified cost $612,638,013) (Note 1) $605,651,611
- ----------------------------------------------------------------------------------------------------------
Cash 338
- ----------------------------------------------------------------------------------------------------------
Interest and other receivables 5,649,137
- ----------------------------------------------------------------------------------------------------------
Receivable for securities sold 7,674,914
- ----------------------------------------------------------------------------------------------------------
Receivable for closed forward currency contracts 4,743,764
- ----------------------------------------------------------------------------------------------------------
Receivable for open forward currency contracts 1,281,231
- ----------------------------------------------------------------------------------------------------------
Total assets 625,000,995
Liabilities
- ----------------------------------------------------------------------------------------------------------
Distributions payable to shareholders 3,213,129
- ----------------------------------------------------------------------------------------------------------
Payable for securities purchased 72,670,722
- ----------------------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 1,017,952
- ----------------------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 1,598
- ----------------------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 2,159
- ----------------------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 146,716
- ----------------------------------------------------------------------------------------------------------
Payable for closed forward currency contracts 5,797,333
- ----------------------------------------------------------------------------------------------------------
Payable for open forward currency contracts 1,424,466
- ----------------------------------------------------------------------------------------------------------
Other accrued expenses 81,275
- ----------------------------------------------------------------------------------------------------------
Written options outstanding at value (premium received $125,450) (Note 3) 23,160
- ----------------------------------------------------------------------------------------------------------
Total liabilities 84,378,510
- ----------------------------------------------------------------------------------------------------------
Net assets $540,622,485
Represented by
- ----------------------------------------------------------------------------------------------------------
Paid-in-capital (Note 1) $570,494,537
- ----------------------------------------------------------------------------------------------------------
Distributions in excess of net investment income (Note 1) (5,877,414)
- ----------------------------------------------------------------------------------------------------------
Accumulated net realized loss on investments and foreign currency transactions (Note 1) (16,975,732)
- ----------------------------------------------------------------------------------------------------------
Net unrealized depreciation of investments and assets and liabilities in foreign currencies (7,018,906)
- ----------------------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to capital shares outstanding $540,622,485
- ----------------------------------------------------------------------------------------------------------
Computation of net asset value
- ----------------------------------------------------------------------------------------------------------
Net asset value per share ($540,622,485 divided by 65,012,152 shares) $8.32
- ----------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Six months ended May 31,1996 (Unaudited)
<S> <C>
Investment Income
- ------------------------------------------------------------------------------------
Interest (net of foreign tax of $105,465) $19,591,000
- ------------------------------------------------------------------------------------
Expenses:
- ------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 2,047,925
- ------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 217,880
- ------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 11,635
- ------------------------------------------------------------------------------------
Administrative services (Note 2) 6,375
- ------------------------------------------------------------------------------------
Reports to shareholders 17,818
- ------------------------------------------------------------------------------------
Auditing 28,254
- ------------------------------------------------------------------------------------
Legal 3,183
- ------------------------------------------------------------------------------------
Registration fees 75
- ------------------------------------------------------------------------------------
Exchange listing fees 27,815
- ------------------------------------------------------------------------------------
Other 4,418
- ------------------------------------------------------------------------------------
Total expenses 2,365,378
- ------------------------------------------------------------------------------------
Expense reduction (Note 2) (50,933)
- ------------------------------------------------------------------------------------
Net expenses 2,314,445
- ------------------------------------------------------------------------------------
Net investment income 17,276,556
- ------------------------------------------------------------------------------------
Net realized loss on investments (Notes 1 and 3) (6,718,004)
- ------------------------------------------------------------------------------------
Net realized gain on forward currency transactions (Notes 1 and 3) 306,727
- ------------------------------------------------------------------------------------
Net realized gain on written options (Notes 1 and 3) 70,864
- ------------------------------------------------------------------------------------
Net unrealized depreciation of forward currency
contracts and foreign currency translation during the period (71,586)
- ------------------------------------------------------------------------------------
Net unrealized depreciation on investments
and written options during the period (16,595,430)
- ------------------------------------------------------------------------------------
Net loss on investments (23,007,429)
- ------------------------------------------------------------------------------------
Net decrease in net assets resulting from operations $(5,730,873)
- ------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Six months ended Year ended
May 31 November 30
- --------------------------------------------------------------------------------------------------------------------------
1996* 1995
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets
- --------------------------------------------------------------------------------------------------------------------------
Operations:
- --------------------------------------------------------------------------------------------------------------------------
Net investment income $17,276,556 $37,461,249
- --------------------------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments and foreign currency transactions (6,340,413) 19,478,458
- --------------------------------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of investments and assets and liabilities (16,667,016) 23,036,965
- --------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from operations (5,730,873) 79,976,672
- --------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders from:
- --------------------------------------------------------------------------------------------------------------------------
Net investment income (17,276,556) (39,052,373)
- --------------------------------------------------------------------------------------------------------------------------
In excess of net invesment income (2,233,777) -
- --------------------------------------------------------------------------------------------------------------------------
Shares repurchased (Note 4) (184,875) (467,593)
- --------------------------------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets (25,426,081) 40,456,706
- --------------------------------------------------------------------------------------------------------------------------
Net Assets
- --------------------------------------------------------------------------------------------------------------------------
Beginning of period 566,048,566 525,591,860
- --------------------------------------------------------------------------------------------------------------------------
End of period (including distributions in
excess of net investment income of $5,877,414 and $3,643,637, respectively) $540,622,485 $566,048,566
- --------------------------------------------------------------------------------------------------------------------------
Number of fund shares
Shares outstanding at beginning of period 65,037,152 65,098,252
- --------------------------------------------------------------------------------------------------------------------------
Shares repurchased (Note 4) (25,000) (61,100)
- --------------------------------------------------------------------------------------------------------------------------
Shares outstanding at end of period 65,012,152 65,037,152
- --------------------------------------------------------------------------------------------------------------------------
* Unaudited.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial Highlights
(For a share outstanding throughout the period)
Six months
ended
May 31 Year ended November 31
- ---------------------------------------------------------------------------------------------------------------------
1996 * 1995 1994
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of period $8.70 $8.07 $9.05
- ---------------------------------------------------------------------------------------------------------------------
Investment operations
- ---------------------------------------------------------------------------------------------------------------------
Net investment income .27 .58 .56
- ---------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (.35) .65 (.84)
- ---------------------------------------------------------------------------------------------------------------------
Total from investment operations (.08) 1.23 (.28)
- ---------------------------------------------------------------------------------------------------------------------
Less distributions:
- ---------------------------------------------------------------------------------------------------------------------
From net investment income (.27) (.60) (.39)
- ---------------------------------------------------------------------------------------------------------------------
In excess of net investment income (.03) -- --
- ---------------------------------------------------------------------------------------------------------------------
From net realized gain on investments -- -- (.07)
- ---------------------------------------------------------------------------------------------------------------------
Return of capital -- -- (.24)
- ---------------------------------------------------------------------------------------------------------------------
Total distributions (.30) (.60) (.70)
- ---------------------------------------------------------------------------------------------------------------------
Increase in net asset value from shares repurchased (a) -- -- --
- ---------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $8.32 $8.70 $8.07
- ---------------------------------------------------------------------------------------------------------------------
Market value, end of period $7.375 $7.750 $7.250
- ---------------------------------------------------------------------------------------------------------------------
Total investment return at market value (%)(b) (1.04) (d) 15.58 (2.38)
- ---------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $540,622 $566,049 $525,592
- ---------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%)(c) .42 (d) 1.00 .87
- ---------------------------------------------------------------------------------------------------------------------
Ratio of net investment income to average net assets (%) 3.10 (d) 6.85 6.64
- ---------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 152.26 (d) 416.86 242.42
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Financial Highlights (continued)
(For a share outstanding throughout the period)
Year ended November 30
- ---------------------------------------------------------------------------------------------------------------------
1993 1992 1991
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of period $9.32 $9.21 $9.08
- ---------------------------------------------------------------------------------------------------------------------
Investment operations
- ---------------------------------------------------------------------------------------------------------------------
Net investment income .55 .60 .68
- ---------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments .21 .28 .34
- ---------------------------------------------------------------------------------------------------------------------
Total from investment operations .76 .88 1.02
- ---------------------------------------------------------------------------------------------------------------------
Less distributions:
- ---------------------------------------------------------------------------------------------------------------------
From net investment income (.55) (.60) (.68)
- ---------------------------------------------------------------------------------------------------------------------
In excess of net investment income (.04) -- --
- ---------------------------------------------------------------------------------------------------------------------
From net realized gain on investments (.44) (.17) (.05)
- ---------------------------------------------------------------------------------------------------------------------
Return of capital -- -- (.16)
- ---------------------------------------------------------------------------------------------------------------------
Total distributions (1.03) (.77) (.89)
- ---------------------------------------------------------------------------------------------------------------------
Increase in net asset value from shares repurchased (a) -- -- --
- ---------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $9.05 $9.32 $9.21
- ---------------------------------------------------------------------------------------------------------------------
Market value, end of period $8.125 $9.125 $9.125
- ---------------------------------------------------------------------------------------------------------------------
Total investment return at market value (%)(b) (.01) 8.69 11.80
- ---------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $589,227 $601,573 $585,649
- ---------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%)(c) .89 .92 1.01
- ---------------------------------------------------------------------------------------------------------------------
Ratio of net investment income to average net assets (%) 5.98 6.51 7.51
- ---------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 303.68 216.24 255.49
- ---------------------------------------------------------------------------------------------------------------------
* Unaudited.
(a) See Note 4 to financial statements.
(b) Total investment return assumes dividend reinvestment
and does not reflect the effect of sales charges.
(c) The ratio of expenses to average net assets for the year ended November 30,
1995 and thereafter includes amounts paid through brokerage services and expense
offset arrangements. Prior period ratios exclude these amounts.
(See Note 2).
(d) Not annualized.
</TABLE>
Notes to financial statements
May 31, 1996 (Unaudited)
Note 1
Significant accounting policies
The fund is registered under the Investment Company Act of 1940, as
amended, as a diversified, closed-end management investment company. The
fund's investment objective is to seek, with equal emphasis, high
current income and relative stability of net asset value by investing in
a portfolio of U.S. government and agency obligations and foreign
governmental obligations with limited maturities.
The following is a summary of significant accounting policies
consistently followed by the fund in the preparation of its financial
statements. The preparation of financial statements is in conformity
with generally accepted accounting principles and requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities. Actual results could differ from those
estimates.
A) Security valuation Investments for which market quotations are
readily available are stated at market value, which is determined using
the last reported sale price, or, if no sales are reported--as in the
case of some securities traded over-the-counter--the last reported bid
price, except that certain U.S. government obligations are stated at the
mean between the bid and asked prices. Short-term investments having
remaining maturities of 60 days or less are stated at amortized cost,
which approximates market value, and other investments are stated at
fair value following procedures approved by the Trustees.
B) Joint trading account Pursuant to an exemptive order issued by the
Securities and Exchange Commission, the fund may transfer uninvested
cash balances into a joint trading account along with the cash of other
registered investment companies managed by Putnam Investment Management,
Inc. ("Putnam Management"), the fund's Manager, a wholly-owned
subsidiary of Putnam Investments, Inc. and certain other accounts. These
balances may be invested in one or more repurchase agreements and/or
short-term money market instruments.
C) Repurchase agreements The fund, or any joint trading account, through
its custodian, receives delivery of the underlying securities, the
market value of which at the time of purchase is required to be in an
amount at least equal to 102% of the resale price, including accrued
interest. Putnam Management is responsible for determining that the
value of these underlying securities is at all times at least equal to
102% of the resale price, including accrued interest.
D) Security transactions and related investment income Security
transactions are accounted for on the trade date (date the order to buy
or sell is executed).
Interest income is recorded on the accrual basis.
E) Foreign currency translation The accounting records of the fund are
maintained in U.S. dollars. The market value of foreign securities,
currency holdings, and other assets and liabilities are recorded in the
books and records of the fund after translation to U.S. dollars based on
the exchange rates on that day. The cost of each security is determined
using historical exchange rates. Income and withholding taxes are
translated at prevailing exchange rates when accrued or incurred. The
fund does not isolate that portion of realized or unrealized gains or
losses resulting from changes in the foreign exchange rate on
investments from fluctuations arising from changes in the market prices
of the securities. Such fluctuations are included with the net realized
and unrealized gain or loss on investments. Net realized gains and
losses on foreign currency transactions represent net exchange gains or
losses on closed forward currency contracts, disposition of foreign
currencies and the difference between the amount of investment income
and foreign withholding taxes recorded on the fund's books and the U.S.
dollar equivalent amounts actually received or paid. Net unrealized
gains and losses on foreign currency transactions arise from changes in
the value of open forward currency contracts and assets and liabilities
other than investments at the period end, resulting from changes in the
exchange rate.
F) Forward currency contracts The fund may engage in forward currency
contracts, which are agreements between two parties to buy and sell
currencies at a set price on a future date, to protect against a decline
in value relative to the U.S. dollar of the currencies in which its
portfolio securities are denominated or quoted (or an increase in the
value of a currency in which securities a fund intends to buy are
denominated, when a fund holds cash reserves and short-term
investments). The U.S. dollar value of forward currency contracts is
determined using forward currency exchange rates supplied by a quotation
service. The market value of the contract will fluctuate with changes in
currency exchange rates. The contract is "marked to market" daily and
the change in market value is recorded as an unrealized gain or loss.
When the contract is closed, the fund records a realized gain or loss
equal to the difference between the value of the contract at the time it
was opened and the value at the time it was closed. The fund could be
exposed to risk if the value of the currency changes unfavorably, if the
counterparties to the contracts are unable to meet the terms of their
contracts or if the fund is unable to enter into a closing position.
G) Futures and options contracts The fund may use futures and options
contracts to hedge against changes in the values of securities the fund
owns or expects to purchase. The fund may also write options on
securities it owns or in which it may invest to increase its current
returns.
The potential risk to the fund is that the change in value of futures
and options contracts may not correspond to the change in value of the
hedged instruments. In addition, losses may arise from changes in the
value of the underlying instruments, if there is an illiquid secondary
market for the contracts, or if the counterparty to the contract is
unable to perform.
Futures contracts are valued at the quoted daily settlement prices
established by the exchange on which they trade. Exchange traded options
are valued at the last sale price, or if no sales are reported, the last
bid price for purchased options and the last ask price for written
options. Options traded over-the-counter are valued using prices
supplied by dealers.
H) TBA purchase commitments The fund may enter into "TBA" (to be
announced) purchase commitments to purchase securities for a fixed unit
price at a future date beyond customary settlement time. Although the
unit price has been established, the principal value has not been
finalized. However, the amount of the commitments will not fluctuate
more than 2.0% from the principal amount. The fund holds, and maintains
until settlement date, cash or high-grade debt obligations in an amount
sufficient to meet the purchase price, or the fund may enter into
offsetting contracts for the forward sale of other securities it owns.
Income on the securities will not be earned until settlement date. TBA
purchase commitments may be considered securities in themselves, and
involve a risk of loss if the value of the security to be purchased
declines prior to the settlement date, which risk is in addition to the
risk of decline in the value of the fund's other assets. Unsettled TBA
purchase commitments are valued at the current market value of the
underlying securities, generally according to the procedures described
under "Security valuation" above.
Although the fund will generally enter into TBA purchase commitments
with the intention of acquiring securities for their portfolio or for
delivery pursuant to options contracts it has entered into, the fund may
dispose of a commitment prior to settlement if Putnam Management deems
it appropriate to do so.
J) Federal taxes It is the policy of the fund to distribute all of its
taxable income within the prescribed time and otherwise comply with the
provisions of the Internal Revenue Code applicable to regulated
investment companies. It is also the intention of the fund to distribute
an amount sufficient to avoid imposition of any excise tax under Section
4982 of the Internal Revenue Code of 1986. Therefore, no provision has
been made for federal taxes on income, capital gains or unrealized
appreciation on securities held and for excise tax on income and capital
gains.
At November 30, 1995, the fund had a capital loss carryover of
approximately $10,854,000 available to offset future net capital gain,
if any, which will expire on November 30, 2002.
K) Distributions to shareholders Distributions to shareholders from net
investment income are recorded on the ex-dividend date. Capital gain
distributions if any, are recorded on the ex-dividend date and paid
annually. The amount and character of income and gains to be distributed
are determined in accordance with income tax regulations which may
differ from generally accepted accounting principles. Reclassifications
are made to the fund's capital accounts to reflect income and gains
available for distribution (or available capital loss carryovers) under
income tax regulations.
Note 2
Management fee, administrative services and other transactions
Compensation of Putnam Management, for management and investment
advisory services is paid quarterly based on the average net assets of
the fund. Such fee is based on the following annual rates: 0.75% of the
first $500 million of average weekly net assets, 0.65% of the next $500
million, 0.60% of the next $500 million, and 0.55 of any amount over
$1.5 billion.
The fund reimburses Putnam Management for the compensation and related
expenses of certain officers of the fund and their staff who provide
administrative services to the fund. The aggregate amount of all such
reimbursements is determined annually by the Trustees.
Trustees of the fund receive an annual Trustees fee of $1,290 and an
additional fee for each Trustee's meeting attended. Trustees who are not
interested persons of Putnam Management and who serve on committees of
the Trustees receive additional fees for attendance at certain committee
meetings.
The fund adopted a Trustee Fee Deferral Plan (the "Plan") which allows
the Trustees to defer the receipt of all or a portion of Trustees Fees
payable on or after July 1, 1995. The deferred fees remain invested in
certain Putnam funds until distribution in accordance with the Plan.
Custodial functions for the fund's assets are provided by Putnam
Fiduciary Trust Company (PFTC), a wholly-owned subsidiary of Putnam
Investments, Inc. Investor servicing agent functions are provided by
Putnam Investor Services, a division of PFTC.
For the six months ended May 31, 1996, fund expenses were reduced by
$50,933 under expense offset arrangements with PFTC. Investor servicing
and custodian fees reported in the Statement of operations exclude these
credits. The fund could have invested a portion of the assets utilized
in connection with the expense offset arrangements in an income
producing asset if it had not entered into such arrangements.
Note 3
Purchase and sales of securities
During the six months ended May 31, 1996, purchases and sales of
investment securities other than U.S. government obligations and short-
term investments aggregated $804,983,569 and $812,409,863, respectively.
Purchases and sales of U.S. government obligations aggregated
$556,449,099 and $540,243,640, respectively. In determining the net gain
or loss on securities sold, the cost of securities has been determined
on the identified cost basis.
Written option transactions during the period are summarized as follows:
Contract Premiums
Amounts Received
- ----------------------------------------------------
Contracts
outstanding at
beginning of
period 16,480,000 $ 70,684
- ----------------------------------------------------
Options
opened 38,600,000 125,450
- ----------------------------------------------------
Options
expired -- --
- ----------------------------------------------------
Options
closed (16,480,000) (70,684)
- ----------------------------------------------------
Written options
outstanding at
end of period 38,600,000 $125,450
- ----------------------------------------------------
Note 4
Shares repurchase program
The Trustees have authorized the fund to repurchase up to 3,250,000 of
its shares in the open market. Repurchases will only be made when the
fund's shares are trading at less than net asset value at times and
amounts as are believed to be in the best interests of the fund's
shareholders. Any repurchases of shares will have the effect of
increasing the net asset value per shares outstanding.
For the period ended May 31, 1996, the fund repurchased 25,000 shares
for $184,875 which reflects a discount from net asset value of $24,575
or approximately 11.73%.
<TABLE>
<CAPTION>
Selected quarterly data
(Unaudited)
Total Net realized and Net increase (decrease)
investment Net investment unrealized gain in net assets
income income (loss) on investments from operations
- ---------------------------------------------------------------------------------------------------
Quarter Per Per Per Per
Ended Total Share Total Share Total Share Total Share
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
2/28/94 $ 9,658,271 $.15 $ 8,376,468 $.13 $ (7,496,765) $(.11) $ 879,703 $ .02
5/31/94 10,370,334 .16 9,094,386 .14 (27,030,125) (.42) (17,935,739) (.28)
8/31/94 10,443,409 .16 9,255,437 .14 (4,746,051) (.07) 4,509,386 .07
11/30/94 11,066,280 .17 10,020,299 .15 (15,345,006) (.24) (5,324,707 (.09)
2/28/95 11,199,913 .17 10,026,658 .15 8,837,178 .14 18,863,836 .29
5/31/95 10,928,771 .17 9,577,590 .15 25,929,26 .40 35,507,187 .55
8/31/95 10,891,091 .17 9,320,623 .14 (6,498,439) (.10) 2,822,184 .04
11/30/95 9,738,433 .15 8,536,048 .14 14,247,417 .21 22,783,465 .35
2/29/96 9,650,263 .15 8,551,769 .13 (7,557,662) (.11) 994,107 .02
5/31/96 9,940,738 .15 8,724,787 .14 (15,449,767) (.24) (6,724,980) (.10)
</TABLE>
Fund information
INVESTMENT MANAGER
Putnam Investment
Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Mutual Funds Corp.
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
John A. Hill
Ronald J. Jackson
Elizabeth T. Kennan
Lawrence J. Lasser
Robert E. Patterson
Donald S. Perkins
George Putnam, III
Eli Shapiro
A.J.C. Smith
W. Nicholas Thorndike
OFFICERS
George Putnam
President
Charles E. Porter
Executive Vice President
Patricia C. Flaherty
Senior Vice President
John D. Hughes
Senior Vice President and Treasurer
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Gary N. Coburn
Vice President
Neil J. Powers
Vice President and Fund Manager
D. William Kohli
Vice President and Fund Manager
Mark J. Siegel
Vice President and Fund Manager
William N. Shiebler
Vice President
John R. Verani
Vice President
Paul M. O'Neil
Vice President
Beverly Marcus
Clerk and Assistant Treasurer
Call 1-800-225-1581 weekdays from 9 a.m. to 5 p.m. Eastern Time for up-
to-date information about the fund's NAV.
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
- --------------
Bulk Rate
U.S. Postage
PAID
Putnam
Investments
- --------------
25864-076 7/96
