Putnam
High Yield
Municipal
Trust
ANNUAL REPORT
March 31, 1998
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* "Putnam High Yield Municipal Trust is invested in a number of high
coupon bonds, which provide valuable price protection during periods of
market fluctuations in addition to their attractive income. Their
defensive quality may become important should inflationary pressures
emerge and interest rates climb."
-- Blake E. Anderson, fund manager
* "Municipal bond credit quality is the strongest in more than a
decade, according to Moody's Investors Service Inc. Credit-rating upgrades
totaled 2,718 in 1997, compared with 161 downgrades. Moody's attributes
the ratings to the healthy economy and greater fiscal discipline."
-- The Wall Street Journal, February 5, 1998
CONTENTS
4 Report from Putnam Management
8 Fund performance summary
12 Portfolio holdings
17 Financial statements
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[copyright] Karsh, Ottawa
Dear Shareholder:
The financial troubles in Asia continued to dominate the capital markets
during Putnam High Yield Municipal Trust's fiscal year, pushing aside worries
that the continued strength in the U.S. economy would have inflationary
implications. The rush of funds to the safety of the U.S. bond market did
drive yields on most bonds, including municipals, lower -- and their prices
higher.
The Federal Reserve Board kept close watch on these events, as you might
expect. But in the end, the Fed remained on the sidelines, apparently content
that the economic engine was still sufficiently under control.
In this environment, Fund Manager Blake Anderson continued to focus on the
fund's objective: maintaining a high level of current tax-free income. In the
following report, Blake discusses his strategy during the 12 months ended
March 31, 1998, and looks at prospects for the new fiscal year.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
May 20, 1998
Report from the Fund Manager
Blake E. Anderson
A surging municipal bond market, inspired by declining interest rates, solid
investor demand, and a historically low default rate, set the stage for Putnam
High Yield Municipal Trust to deliver attractive performance gains for the
fiscal year ended March 31, 1998. Even a brief setback in October, when the
reality of Asia's turmoil washed ashore, could not irreversibly shake the
rising confidence of municipal bond investors.
For the period, your fund produced total returns of 8.94% at net asset value
and 9.67% at market price. The fund's dividend rate of 7.44% at net asset
value (6.57% at market price) was well ahead of its investment category's
average yield of 6.55% on March 31, 1998, according to Lipper Analytical
Services. Complete performance details begin on page 8.
* MUNICIPAL MARKET OVERVIEW
Interest rates trended down during the year with the bellwether 30-year
Treasury bond falling more than a full percentage point to below 6%. While
this event resulted in rising municipal bond prices, it did encourage a number
of budget-minded issuers to call in their higher-yielding bonds -- many of
which were issued during the late 1980s and early 1990s -- and to reissue new
bonds at the lower rates. Consequently, limiting call risk was one of our top
priorities. Investing in noncallable bonds or bonds with distant call dates
improves the fund's prospects of maintaining a reliable level of income.
The municipal bond market has become attractively priced relative to the
Treasury market, a state of affairs that hasn't occurred since the flat-tax
concern of 1996. Municipal bonds (as represented by 30-year insured
municipals) are now offering almost 90% of the yield of long-term Treasury
bonds.
The first quarter of 1998 was notable for its huge incremental supply -- an
increase of approximately 70% over the supply brought to market one year ago.
Demand for municipal bonds also rose, fueled primarily by the bargain prices,
which explained the relative balance in this market. Also noteworthy was the
unusually flat tax-exempt yield curve. With the 30-year bond paying only a
modest 30 to 40 basis points over a 10-year bond, investors were not
compensated for taking on higher risk. For this reason, we found the best
value (attractive yield with minimal volatility) in the intermediate range of
the yield curve -- anywhere from 8 to 15 years.
* AIRLINES, UTILITIES, AND HEALTH CARE DOMINATE PORTFOLIO
At the end of the fiscal year, your portfolio was diversified among 71 issues
from 24 states and had an average quality rating of A. We maintained the
fund's barbell structure, keeping about 38% of its assets invested in the
highest-rated issues -- Aaa -- and 57% invested in issues rated Baa or below.
We continue to avoid issues rated Aa and A, since we consider the higher
quality Aaa-rated bonds to be more fairly priced relative to lower-rated
bonds.
The ongoing strength of the economy coupled with weak petroleum prices has
been a boon for the airline and transportation sector. Having survived
deregulation and effectively priced themselves in their hub markets, airlines
appear to represent some of the best opportunities in the lower-rated end of
the municipal bond market. Industrial revenue bonds backed by United Airlines
and American Airlines best represent our strategy here. At the end of the
period, airline/transportation holdings made up the largest portfolio sector
at 27.4% of total net assets.
[GRAPHIC OMITTED: pie chart CREDIT QUALITY OVERVIEW]
CREDIT QUALITY OVERVIEW*
Aaa 38.0%
Aa 2.1%
A 1.4%
Baa 19.2%
Ba 18.8%
B 18.9%
VMIGI 1.6%
Footnote reads:
* As a percentage of market value as of 3/31/98. All ratings reflect Moody's
descriptions unless noted otherwise; percentages may include unrated bonds
considered by Putnam Management to be of comparable quality. Ratings will vary
over time.
Over the past four years, deregulation and the ensuing restructuring of the
utility sector have also created some dynamic investment opportunities. The
challenge of identifying the potential winners -- and avoiding the losers --
provides an excellent example of Putnam's in-depth research process. For
example, since the deregulation process varies across the nation, we must
thoroughly investigate each state's regulatory structure to discern how
favorable the environment is.
In an unfriendly climate, the state may not be taking steps to protect the
older utilities and, in fact, may favor the newer, low-cost start-ups. A
utility-friendly state takes a more evolutionary approach. Typically this is a
state in which our better credit risks lie. We also analyze the cost of a
utility company's generation process relative to its competitors. An expensive
nuclear plant would be less attractive, as lower-cost providers have greater
pricing flexibility to maintain market dominance. Tucson Electric is one
company that we expect would be a strong survivor in this more competitive
environment.
Health care, at nearly 18% of total net assets, performed well over the
period. Given the yield spread compression between higher-quality and
lower-quality bonds, we have retained the higher-yielding coupon holdings and
sold par bonds with lower coupons, which in our estimation are overvalued.
The forest and paper products sector was focused primarily on paper companies,
which are benefiting from solid demand growth in Europe and North America for
printing and writing grades because of strong advertising revenues. We will be
watching for signs of Asia's impact on this sector. On the wood products side,
lumber prices were favorably affected by steady housing starts and demand.
Stone Container, a large integrated paper company, is the fund's largest
issuer in this sector.
[GRAPHIC OMITTED: TOP 10 HOLDINGS]
TOP 10 HOLDINGS
Iowa Financing Authority Health Care Facility
9.25%, 7/1/25
Los Angeles (California) Regional Airports Improvement Corp.
9.25%, 8/1/24
Delaware Valley Regional Financing Authority
7.75%, 7/1/27
Butler (Alabama) Industrial Development Board
8.00%, 9/1/28
Midland County (Michigan) Economic Development Corp.
9.50%, 7/23/09
Denver (Colorado) City and County Airport
8.50%, 11/15/23
Massachusetts State Port Authority Special Project
10.00%, 3/1/26
Texas State Housing and Community Affairs Home Mortgage
9.77%, 7/2/24
Hammond (Indiana) Industrial Port Authority
9.65%, 6/1/14
Hodge (Louisiana) Combined Utilities
9.00%, 3/1/10
Footnote reads:
These holdings represent 28.1% of the fund's net assets as of 3/31/98.
Portfolio holdings will vary over time.
* PROCEEDING WITH CAUTION
Careful security selection and in-depth credit analysis are fundamental to the
fund's investment strategy, particularly as we attempt to discover better
value in bonds that carry ratings below investment grade. These are the bonds
that can add tremendously to the fund's income level, but they also mean
greater credit risk and require the most meticulous research efforts.
The Asian crisis has had a dramatic impact on interest rates everywhere in the
world except the United States. We've been expecting interest rates to rise
slightly, but that has not occurred as of this writing. Nevertheless, we
consider a rate increase more likely than a decline, due to the delayed, yet
inevitable consequences of the troubles in Asia. In our opinion, this is not a
good time to expose the portfolio to bonds with longer maturities and higher
interest-rate risk. We believe that a cautious strategy will produce the best
returns in the months ahead.
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 3/31/98, there is no guarantee the fund will continue to hold
these securities in the future.
The lower credit ratings of high-yield bonds reflect a greater possibility
that adverse changes in the economy or poor performance by the issuers of
these bonds may affect the issuer's ability to pay principal and interest.
Performance summary
Performance should always be considered in light of a fund's investment
strategy. Putnam High Yield Municipal Trust is designed for investors
seeking high current income free from federal income tax through
higher-yielding, lower-rated municipal securities.
TOTAL RETURN FOR PERIODS ENDED 3/31/98
Lehman Bros. Consumer
Market Municipal Price
(common shares) NAV price Bond Index Index
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1 year 8.94% 9.67% 10.72% 1.38%
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5 years 42.29 45.52 39.15 12.95
Annual average 7.31 7.79 6.83 2.47
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Life of fund (5/25/89) 101.51 108.32 98.99 31.02
Annual average 8.24 8.65 8.10 3.11
- ------------------------------------------------------------------------------
Performance data represent past results and do not reflect future
performance. 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
12 months ended 3/31/98
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Distributions (common shares)
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Number 12
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Income $0.69
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Capital gains --
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Total $0.69
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Preferred shares Series A (900 shares)
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Income $1,836.34
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Capital gains --
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Total $1,836.34
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Share value
(common shares): NAV Market price
- ------------------------------------------------------------------------------
3/31/97 $9.12 $10.25
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3/31/98 9.28 10.50
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Current return
(common shares): NAV Market price
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End of period
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Current dividend rate2 7.44% 6.57%
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Taxable equivalent3 12.32 10.88
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1 Capital gains, if any, are taxable for federal and, in most cases, state
tax purposes. For some investors, investment income may also be subject to
the federal alternative minimum tax. Investment income may be subject to
state and local taxes.
2 Income portion of most recent distribution, annualized and divided by NAV
or POP at end of period.
3 Assumes maximum 39.6% federal tax rate. Results for investors subject to
lower tax rates would not be as advantageous.
TERMS AND DEFINITIONS
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 in the fund.
Net asset value (NAV) is the value of all your fund's assets, minus any
liabilities and the net assets allocated to remarketed preferred shares,
divided by the number of outstanding common 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 Municipal Bond Index* is an unmanaged list of long-term
fixed-rate investment-grade tax-exempt bonds representative of the
municipal bond market.
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.
Report of independent accountants
To the Trustees and Shareholders of
Putnam High Yield Municipal Trust
In our opinion, the accompanying statement of assets and liabilities,
including the portfolio of investments owned, except for bond ratings, and the
related statements of operations and of changes in net assets and the
financial highlights present fairly, in all material respects, the financial
position of Putnam High Yield Municipal Trust (the "fund") at March 31, 1998,
and the results of its operations, the changes in its net assets and the
financial highlights for the periods indicated, in conformity with generally
accepted accounting principles. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits, which included confirmation of investments owned at March 31, 1998
by correspondence with the custodian and broker, provide a reasonable basis
for the opinion expressed above.
Price Waterhouse LLP
Boston, Massachusetts
May 12, 1998
Portfolio of investments owned
March 31, 1998
Key to Abbreviations
AMBAC - AMBAC Indemnity Corporation
COP - Certificate of Participation
FGIC - Financial Guaranty Insurance Company
FNMA Coll. - Federal National Mortgage Association Collateralized
FSA - Financial Security Assurance
GNMA Coll. - Government National Mortgage Association Collateralized
IFB - Inverse Floating Rate Bonds
IF COP - Inverse Floating Rate Certificate of Participation
MBIA - Municipal Bond Investors Assurance Corporation
VRDN - Variable Rate Demand Notes
<TABLE>
<CAPTION>
MUNICIPAL BONDS AND NOTES (98.4%) *
PRINCIPAL AMOUNT RATINGS** VALUE
Alabama (2.7%)
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<S> <C> <C> <C>
$ 5,750,000 Butler, Indl. Dev. Board Rev. Bonds (Solid Waste
Disp. James River Corp.), 8s, 9/1/28 BBB- $ 6,641,250
Arizona (2.5%)
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2,500,000 Coconino Cnty., Poll. Control Corp. Rev. Bonds
(Tucson/Navajo Elec. Pwr.), Ser. A, 7 1/8s,
10/1/32 B2 2,821,875
3,000,000 Tucson, Arpt. Auth. Special Fac. Rev. Bonds
(Lockheed Aermod Ctr., Inc.), 8.7s, 9/1/19 A3 3,356,250
--------------
6,178,125
California (6.7%)
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3,500,000 CA Hlth. Fac. Auth. Rev. Bonds (Cedar-Sinai
Med. Ctr.), MBIA, 5 1/8s, 8/1/27 Aaa 3,434,375
5,700,000 CA Statewide Cmnty. Dev. Auth. IF COP
(Motion Picture & TV Fund), AMBAC,
5.35s, 1/1/22 Aaa 5,343,750
6,415,000 Los Angeles, Regl. Arpt. Impt. Corp Rev. Bonds
(Continental Airlines), 9 1/4s, 8/1/24 B+ 7,770,169
--------------
16,548,294
Colorado (5.2%)
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Denver, City & Cnty. Arpt. Rev. Bonds, Ser. A
3,670,000 8 3/4s, 11/15/23 Baa1 4,280,138
1,330,000 Prerefunded, 8 3/4s, 11/15/23 Aaa 1,551,113
5,805,000 MBIA, 8 1/2s, 11/15/23 # Aaa 6,545,138
545,000 Prerefunded, MBIA, 8 1/2s, 11/15/23 # Aaa 612,444
--------------
12,988,833
Delaware (2.8%)
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5,000,000 Delaware Valley, Regl. Fin. Auth. Govt. Rev. Bonds,
Ser. C, AMBAC, 7 3/4s, 7/1/27 Aaa 7,018,750
Florida (0.4%)
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1,000,000 FL Hsg. Fin. Agcy. VRDN (Woodlands), 3.5s,
12/1/07 A-1+ 1,000,000
Georgia (4.1%)
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2,000,000 De Kalb Cnty., Hsg. Auth. Multi-Fam. Hsg. VRDN
(Wood Hills Apt.), 3.7s, 12/1/07 A-1+ 2,000,000
3,025,000 De Kalb Cnty., Hsg. Auth. Muni Rev. Bonds
(Briarcliff Park Apts.), Ser. B, 10s, 4/1/17 B+/P 3,437,156
3,900,000 GA Med. Ctr. Hosp. Auth. IFB (Columbus Regl.
Hlth. Care Syst.), Ser. B, MBIA, 8.749s, 8/1/10 Aaa 4,597,125
--------------
10,034,281
Illinois (5.0%)
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Chicago, O'Hare Intl. Arpt. Special Fac. Rev. Bonds
2,318,000 (United Air Lines, Inc.), Ser. B, 8.95s, 5/1/18 Baa3 2,607,750
1,760,000 (United Air Lines, Inc.), Ser. 84A, 8.85s, 5/1/18 Baa3 1,977,800
4,250,000 (American Airlines, Inc.), 8.2s, 12/1/24 Baa2 5,121,250
IL Dev. Fin. Auth. Rev. Bonds (Cmnty. Rehab.
Providers Fac.)
950,000 Ser. A 7 7/8s, 7/1/20 BB/P 1,086,563
1,300,000 Prerefunded, 7 7/8s, 7/1/20 AAA/P 1,595,750
--------------
12,389,113
Indiana (4.4%)
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5,414,153 Hammond, Indl. Port Auth. COP, 9.65s, 6/1/14 BB+/P 5,887,892
4,500,000 Indianapolis, Indl. Arpt. Auth. Special Fac.
Rev. Bonds (Federal Express Corp.),
7.1s, 1/15/17 Baa2 5,073,750
--------------
10,961,642
Iowa (5.5%)
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2,000,000 Des Moines, Hosp. Rev. Bonds (Des Moines
Genl. Hosp), Ser. B, 8 1/4s, 11/15/11 BB-/P 2,312,500
8,500,000 IA Fin. Auth. Hlth. Care Fac. Rev. Bonds
(Care Initiatives), 9 1/4s, 7/1/25 BB/P 11,432,500
--------------
13,745,000
Kentucky (2.4%)
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4,000,000 Boone Cnty., Poll. Control Rev. Bonds (Dayton
Pwr. & Lt. Co.), Ser. A, 6 1/2s, 11/15/22 Aa3 4,375,000
1,455,000 Jefferson Cnty., 1st Mtge. Rev. Bonds
(AHF/KY-IOWA, Inc.), 10 1/4s, 1/1/20 B-/P 1,527,750
--------------
5,902,750
Louisiana (5.8%)
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5,000,000 Hodge, Combined Util. Rev. Bonds (Stone
Container Corp.), 9s, 3/1/10 B/P 5,418,750
900,000 Jefferson, Parish Hosp. Svcs. VRDN (West
Jefferson Med. Ctr.), 3.7s, 1/1/26 VMIG1 900,000
2,500,000 LA Pub. Fac. Auth. 1st Mtge. Rev. Bonds
(St. James Place), 10s, 11/1/21 B-/P 2,765,625
2,000,000 St. Charles, Parish Poll. Control Rev. Bonds
(LA Pwr. & Lt.), 8 1/4s, 6/1/14 Baa3 2,135,000
3,000,000 W. Feliciana, Parish Poll. Control Rev. Bonds
(Gulf States Utils. Co.), 8s, 12/1/24 Ba1 3,221,250
--------------
14,440,625
Massachusetts (16.5%)
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MA State Hlth. & Edl. Fac. Auth. IFB
3,000,000 (St. Elizabeth Hosp.), Ser. E, FSA, 9.72s, 8/15/21 Aaa 3,532,500
2,000,000 (New England Medical Ctr.), MBIA, 6.48s, 7/1/18 Aaa 2,025,000
1,125,000 MA State Hlth. & Edl. Fac. Auth. Rev. Bonds
(Norwood Hosp.), Ser. E, 7 3/4s, 7/1/07 Ba2 1,153,575
4,500,000 MA State Hsg. Fin. Agcy. Rev. Bonds, Ser. 53,
MBIA, 6.15s, 12/1/29 # Aaa 4,770,000
MA State Indl. Fin. Agcy. Res. Recvy. Rev. Bonds
(Southeastern MA)
1,500,000 Ser. B, 9 1/4s, 7/1/15 BB-/P 1,706,250
3,500,000 Ser. A, 9s, 7/1/15 BB-/P 3,968,125
MA State Indl. Fin. Agcy. Rev. Bonds
925,000 (Odd Fellows Home of MA), 9.6s, 1/1/15 BB-/P 981,656
4,500,000 (Orchard Cove, Inc.), 9s, 5/1/22 AAA/P 5,405,625
2,410,000 (MA Tpk.), 9s, 10/1/20 AAA/P 2,726,313
4,250,000 (Emerson College), 8.9s, 1/1/18 BBB-/P 4,690,938
3,400,000 (Evanswood Bethzatha), 7.85s, 1/15/17 B+/P 3,608,250
5,800,000 MA State Port Auth. Rev. Bonds (Harborside
Hyatt), 10s, 3/1/26 B/P 6,343,750
--------------
40,911,982
Michigan (6.2%)
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2,605,000 Detroit, Loc. Dev. Fin. Auth. Tax Increment Rev.
Bonds, Ser. A, 9 1/2s, 5/1/21 BBB+/P 3,256,250
4,800,000 MI State Strategic Fund Ltd. Oblig. Rev. Bonds
(Mercy Svcs. for Aging), 9.4s, 5/15/20 AAA/P 5,370,000
6,000,000 Midland Cnty., Econ. Dev. Corp. Poll. Ctrl.
Rev. Bonds, Ser. B, 9 1/2s, 7/23/09 B/P 6,630,000
--------------
15,256,250
Mississippi (1.3%)
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3,035,000 Claiborne Cnty., Poll. Control Rev. Bonds (Middle
South Energy, Inc.), Ser. C, 9 7/8s, 12/1/14 Ba1 3,226,478
Missouri (2.0%)
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4,700,000 Kansas City, Indl. Dev. Auth. Hlth. Fac. Rev. Bonds
(Park Lane Med. Ctr.), 8 3/4s, 1/1/15 BB+/P 4,976,125
Nebraska (0.5%)
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1,000,000 NE Investment Fin. Auth. IFB, MBIA, 9.335s, 12/8/16 Aaa 1,185,000
New Hampshire (2.0%)
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NH Higher Ed. & Hlth. Fac. Auth. Rev. Bonds
1,870,000 (Havenwood-Heritage Heights), 9 3/4s,
12/1/19 AAA/P 2,094,400
1,000,000 (NH College), 6 3/8s, 1/1/27 BBB- 1,055,000
1,500,000 NH State Bus. Fin. Auth. Swr. & Solid Waste
Rev. Bonds (Crown Paper), 7 7/8s, 7/1/26 BB- 1,745,625
--------------
4,895,025
New York (6.8%)
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2,350,000 NY State Energy Res. & Dev. Auth. Poll. Control
IFB, FGIC, 10.048s, 7/1/29 (acquired 12/1/94
cost $2,453,729) [DBL. DAGGERS] Aaa 3,072,625
4,000,000 NY State Energy Res. & Dev. Auth. Poll. Control
Rev. Bonds (Rochester Gas & Electric, Co.),
Ser. C, FSA, 8 1/8s, 12/1/28 Aaa 4,194,480
3,000,000 NY State Hsg. Fin. Agcy. Svcs. Contract Oblig.
Rev. Bonds, Ser. A, 7 3/8s, 9/15/21 Aaa 3,401,250
NY State Local Govt. Assistance Corp.
Rev. Bonds
1,500,000 Ser. A, 7s, 4/1/16 Aaa 1,648,125
2,000,000 Ser. D, 6 3/4s, 4/1/21 Aaa 2,222,500
2,160,000 Port Auth. NY & NJ Special Oblig. Rev. Bonds
(Continental/Eastern Laguardia), 9 1/8s, 12/1/15 Ba2 2,427,300
--------------
16,966,280
Ohio (2.0%)
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4,550,000 Dayton, Special Fac. Rev. Bonds (Emery Air
Freight Corp.), 12 1/2s, 10/1/09 AAA/P 4,877,191
Pennsylvania (6.2%)
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280,000 Allegheny Cnty., Indl. Dev. Auth. Arpt. Special Fac.
Rev. Bonds (U.S. Air, Inc.), Ser. A, 8 7/8s, 3/1/21 B3 319,550
2,000,000 Montgomery Cnty., Higher Ed. & Hlth. Auth. Hosp.
Rev. Bonds (United Hosp., Inc.), Ser. A, 8 3/8s,
11/1/11 AAA/P 2,172,500
3,250,000 PA Econ. Dev. Fin. Auth. Rev. Bonds (MacMillan
Ltd. Partnership), 7.6s, 12/1/20 Baa2 3,554,688
2,500,000 PA State Higher Ed. Assistance Agcy. Student
Loan IFB, AMBAC, 10.534s, 9/3/26 Aaa 2,909,375
2,100,000 Philadelphia, Muni. Auth. Rev. Bonds, Ser. C,
8 5/8s, 11/15/16 Aaa 2,449,125
3,400,000 Philadelphia, Regl. Port Auth. Lease IFB
(Kidder Peabody), MBIA, 8.52s, 9/1/13 Aaa 3,969,500
--------------
15,374,738
Texas (3.8%)
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2,500,000 Alliance, Arpt. Auth. Special Fac. Rev. Bonds
(American Airlines, Inc.), 7 1/2s, 12/1/29 Baa2 2,715,625
715,000 Cherokee Cnty., Hlth. Fac. Dev. Corp. Rev. Bonds
(Nancy Travis Memorial Hosp.), 10s, 5/15/13 B/P 883,919
4,800,000 TX State Hsg. & Cmnty. Affairs Home Mtge. IFB,
Ser. C, FNMA Coll., GNMA Coll., 9.776s, 7/2/24 AAA 5,928,000
--------------
9,527,544
Utah (3.3%)
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3,300,000 Carbon Cnty., Util. Rev. Bonds (Laidlaw Solid
Waste Disp.), Ser. A, 7 1/2s, 2/1/10 Baa2 3,749,620
4,000,000 Tooele Cnty., Poll. Control Rev. Bonds (Laidlaw
Environmental), Ser. A, 7.55s, 7/1/27 B-/P 4,475,000
--------------
8,224,620
Wisconsin (0.3%)
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730,000 WI Hsg. & Econ. Dev. Auth. IFB (Home
Ownership Dev.), 10.057s, 10/25/22 Aa3 831,288
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Total Investments (cost $228,057,211) *** $ 244,101,184
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* Percentages indicated are based on net assets of $248,063,488.
** The Moody's or Standard & Poor's ratings indicated are believed
to be the most recent ratings available at March 31, 1998 for the
securities listed. Ratings are generally ascribed to securities at the
time of issuance. While the agencies may from time to time revise such
ratings, they undertake no obligation to do so, and the ratings do not
necessarily represent what the agencies would ascribe to these
securities at March 31, 1998. Securities rated by Putnam are indicated
by "/P" and are not publicly rated. Ratings are not covered by the
Report of independent accountants.
*** The aggregate identified cost on a tax basis is $228,057,211,
resulting in gross unrealized appreciation and depreciation of
$18,861,191 and $2,817,218, respectively, or net unrealized appreciation
of $16,043,973.
[DBL. DAGGER] Restricted, excluding 144A securities, as to public resale. The
total market value of restricted securities held at March 31, 1998 was
$3,072,625 or 1.2% of net assets.
# A portion of these securities were pledged and segregated with
the custodian to cover margin requirements for futures contracts at
March 31, 1998.
The rates shown on IFB and IF COP, which are securities paying
interest rates that vary inversely to changes in the market interest
rates, and VRDN's are the current interest rates at March 31, 1998.
The fund had the following industry group concentrations greater
than 10% at March 31, 1998 (as a percentage of net assets):
Transportation 27.4%
Healthcare 18.1
Housing 10.9
<CAPTION>
- ----------------------------------------------------------------------------------------
Futures Contracts Outstanding at March 31, 1998
Total Aggregate Face Expiration Unrealized
Value Value Date Appreciation
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Municipal Bond
Index (long) $2,572,500 $2,545,594 Jun-98 $26,906
- ----------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
March 31, 1998
<S> <C>
Assets
- ---------------------------------------------------------------------------------------------------
Investment in securities at value
(identified cost $228,057,211) (Note 1) $244,101,184
- ---------------------------------------------------------------------------------------------------
Cash 823,704
- ---------------------------------------------------------------------------------------------------
Interest receivable 4,795,929
- ---------------------------------------------------------------------------------------------------
Receivable for securities sold 90,000
- ---------------------------------------------------------------------------------------------------
Receivable for variation margin 9,188
- ---------------------------------------------------------------------------------------------------
Total assets 249,820,005
Liabilities
- ---------------------------------------------------------------------------------------------------
Distributions payable to shareholders 1,258,188
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 419,715
- ---------------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 21,111
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 9,048
- ---------------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 1,635
- ---------------------------------------------------------------------------------------------------
Other accrued expenses 46,820
- ---------------------------------------------------------------------------------------------------
Total liabilities 1,756,517
- ---------------------------------------------------------------------------------------------------
Net assets $248,063,488
Represented by
- ---------------------------------------------------------------------------------------------------
Series A remarketed preferred shares, (8,000 shares authorized;
900 shares issued at $50,000 per share) (Note 4) $45,000,000
- ---------------------------------------------------------------------------------------------------
Paid-in capital - common shares (Note 1) 201,970,339
- ---------------------------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 813,649
- ---------------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (Note 1) (15,791,379)
- ---------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 16,070,879
- ---------------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $248,063,488
Computation of net asset value
- ---------------------------------------------------------------------------------------------------
Series A remarketed preferred shares $45,000,000
- ---------------------------------------------------------------------------------------------------
Cumulative undeclared dividends on
Series A remarketed preferred shares 28,111
- ---------------------------------------------------------------------------------------------------
Net assets allocated to Series A remarketed preferred shares-
liquidation preference $45,028,111
- ---------------------------------------------------------------------------------------------------
Net assets available to common shares $203,035,377
- ---------------------------------------------------------------------------------------------------
Net assets per common share
($203,035,377 divided by 21,882,030 shares) $9.28
- ---------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Year ended March 31, 1998
<S> <C>
Investment income:
- --------------------------------------------------------------------------------------------------
Tax exempt interest income: $18,555,051
- --------------------------------------------------------------------------------------------------
Expenses:
- --------------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 1,722,852
- --------------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 260,799
- --------------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 11,940
- --------------------------------------------------------------------------------------------------
Administrative services (Note 2) 6,726
- --------------------------------------------------------------------------------------------------
Reports to shareholders 23,267
- --------------------------------------------------------------------------------------------------
Auditing 50,657
- --------------------------------------------------------------------------------------------------
Legal 24,044
- --------------------------------------------------------------------------------------------------
Postage 21,347
- --------------------------------------------------------------------------------------------------
Exchange listing fees 41,406
- --------------------------------------------------------------------------------------------------
Preferred share remarketing agent fees 137,750
- --------------------------------------------------------------------------------------------------
Other 15,113
- --------------------------------------------------------------------------------------------------
Total expenses 2,315,901
- --------------------------------------------------------------------------------------------------
Expense reduction (Note 2) (70,305)
- --------------------------------------------------------------------------------------------------
Net expenses 2,245,596
- --------------------------------------------------------------------------------------------------
Net investment income 16,309,455
- --------------------------------------------------------------------------------------------------
Net realized loss on investments (Notes 1 and 3) (11,047,836)
- --------------------------------------------------------------------------------------------------
Net realized loss on futures contracts (Note 1) (300,474)
- --------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments and futures during the year 14,919,515
- --------------------------------------------------------------------------------------------------
Net gain on investments 3,571,205
- --------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $19,880,660
- --------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Year ended March 31
--------------------------------
1998 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase in net assets
- ----------------------------------------------------------------------------------------------------------------------
Operations:
- ----------------------------------------------------------------------------------------------------------------------
Net investment income $16,309,455 $17,450,841
- ----------------------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments (11,348,310) 800,327
- ----------------------------------------------------------------------------------------------------------------------
Net unrealized appreciation
(depreciation) of investments 14,919,515 (2,627,862)
- ----------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 19,880,660 15,623,306
- ----------------------------------------------------------------------------------------------------------------------
Distributions to Series A remarketed preferred
shareholders from net investment income (1,652,706) (1,577,970)
- ----------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations
applicable to common shareholders (excluding cumulative
undeclared dividends on remarketed preferred shares
of $28,111 and $ 22,191, respectively) 18,227,954 14,045,336
- ----------------------------------------------------------------------------------------------------------------------
Distributions to common shareholders from
net investment income (15,035,863) (14,890,644)
- ----------------------------------------------------------------------------------------------------------------------
Increase from issuance of common shares in
connection with reinvestment of distributions 2,035,042 2,083,092
- ----------------------------------------------------------------------------------------------------------------------
Total increase in net assets 5,227,133 1,237,784
Net assets
- ----------------------------------------------------------------------------------------------------------------------
Beginning of year 242,836,355 241,598,571
- ----------------------------------------------------------------------------------------------------------------------
End of year (including undistributed net investment
income of $813,649 and $1,192,763, respectively) $248,063,488 $242,836,355
Number of fund shares
- ----------------------------------------------------------------------------------------------------------------------
Common shares outstanding at beginning of year 21,679,818 21,458,424
- ----------------------------------------------------------------------------------------------------------------------
Shares issued in connection with reinvestment of distributions 202,212 221,394
- ----------------------------------------------------------------------------------------------------------------------
Common shares outstanding at end of year 21,882,030 21,679,818
- ----------------------------------------------------------------------------------------------------------------------
Remarketed preferred shares outstanding at
beginning and end of year 900 900
- ----------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
- ------------------------------------------------------------------------------------------------------------------------------------
Per-Share
operating performance Year ended March 31
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period (common shares) $9.12 $9.16 $9.03 $9.23 $9.49
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .75 .80 .80 .81 .81
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .18 (.08) .13 (.19) (.27)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .93 .72 .93 .62 .54
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income:
- ------------------------------------------------------------------------------------------------------------------------------------
To preferred shareholders (.08) (.07) (.08) (.07) (.05)
- ------------------------------------------------------------------------------------------------------------------------------------
To common shareholders (.69) (.69) (.72) (.75) (.75)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.77) (.76) (.80) (.82) (.80)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period (common shares) $9.28 $9.12 $9.16 $9.03 $9.23
- ------------------------------------------------------------------------------------------------------------------------------------
Market value,
end of period (common shares) $10.50 $10.25 $10.00 $9.50 $9.25
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return at
market value (%)(common shares)(a) 9.67 10.26 13.60 11.50 (4.99)
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(total fund) (in thousands) $248,063 $242,836 $241,599 $236,333 $238,148
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b)(c) 1.15 1.15 1.17 1.17 1.17
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%)(b) 7.27 8.05 7.79 8.27 7.97
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 16.78 9.30 34.45 49.11 28.55
- ------------------------------------------------------------------------------------------------------------------------------------
(a) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges.
(b) Ratios reflect net assets available to common shares only; net investment income ratio also
reflects reduction for dividend payments to preferred shareholders.
(c) The ratio of expenses to average net assets for the year ended March 31, 1996 and thereafter,
includes amounts paid through expense offset arrangements. Prior period ratios exclude
these amounts (Note 3)
</TABLE>
Notes to financial statements
March 31, 1998
Note 1
Significant accounting policies
Putnam High Yield Municipal Trust (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 high
current income exempt from federal income tax. The fund intends to achieve its
objective by investing in high yielding tax-exempt municipal securities
constituting a portfolio that the fund's Manager, Putnam Investment
Management, Inc., ("Putnam Management"), a wholly owned subsidiary of Putnam
Investments, Inc., believes to be consistent with prudent investment
management.
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 Tax-exempt bonds and notes are stated on the basis of
valuations provided by a pricing service, approved by the Trustees, which uses
information with respect to transactions in bonds, quotations from bond
dealers, market transactions in comparable securities and various
relationships between securities in determining value. The fair value of
restricted securities is determined by Putnam Management following procedures
approved by the Trustees, and such valuations and procedures are reviewed
periodically by the Trustees.
B) 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.
C) 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. 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. Realized gains and losses on purchased
options are included in realized gains and losses on investment securities.
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.
D) 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, as amended. Therefore, no provision has been made for federal taxes
on income, capital gains or unrealized appreciation on securities held nor for
excise tax on income and capital gains.
At March 31, 1998, the fund had a capital loss carryover of approximately
$12,422,000 available to offset future capital gains, if any. The amount of
the carryover and the expiration dates are:
Loss Carryover Expiration
-------------- --------------
$3,135,000 March 31, 2003
1,309,000 March 31, 2004
7,978,000 March 31, 2005
E) Distributions to shareholders Distributions to common and preferred
shareholders are recorded by the fund on the ex-dividend date. Dividends on
remarketed preferred shares become payable when, as and if declared by the
Trustees. Each dividend period for the remarketed preferred shares is
generally a seven day period. The applicable dividend rate for the remarketed
preferred shares on March 31, 1998 was 3.8%. 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.
These differences include temporary and permanent differences of post October
loss deferrals, realized and unrealized gains and losses on certain future
contracts and dividends payable. 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. For the year
ended March 31, 1998 the fund required no such reclassifications.
F) Determination of net asset value Net asset value of the common shares is
determined by dividing the value of all assets of the fund, less all
liabilities and the liquidation preference of any outstanding remarketed
preferred shares, by the total number of common shares outstanding.
G) Amortization of bond premium and accretion of bond discount Any premium
resulting from the purchase of securities in excess of maturity value is
amortized on a yield-to-maturity basis. Discounts on zero coupon bonds,
original issue discount, stepped-coupon bonds and payment in kind bonds are
accreted according to the yield to maturity basis.
Note 2
Management fee, administrative
services and other transactions
Compensation of Putnam Management for management investment advisory and
administrative services is paid quarterly based on the average net assets of
the fund. Such fee is based on the annual rate of 0.70% of average weekly net
assets.
If dividends payable on remarketed preferred shares during any dividend
payment period plus any expenses attributable to remarketed preferred shares
for that period exceed the fund's net income attributable to the proceeds of
the remarketed preferred shares during that period, then the fee payable to
Putnam Management for that period will be reduced by the amount of the excess
(but not more than .70% of the liquidation preference of the remarketed
preferred shares outstanding during the period).
The fund reimburses Putnam Management an allocated amount 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.
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 year ended March 31, 1998, fund expenses were reduced by $70,305 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.
Each Trustee of the fund receives an annual Trustee fee, of which $480 has
been allocated to the fund, 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 has adopted a Trustee Fee Deferral Plan (the "Deferral 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 in the fund and are
invested in certain Putnam funds until distribution in accordance with the
Deferral Plan.
The fund has adopted an unfunded noncontributory defined benefit pension plan
(the "Pension Plan") covering all Trustees of the fund who have served as
Trustee for at least five years. Benefits under the Pension Plan are equal to
50% of the Trustee's average total retainer and meeting fees for the three
years preceding retirement. Pension expense for the fund is included in
Compensation of Trustees in the Statement of operations. Accrued pension
liability is included in Payable for compensation of Trustees in the Statement
of assets and liabilities.
Note 3
Purchase and sales of securities
During the year ended March 31, 1998, purchases and sales of investment
securities other than short-term investments aggregated $42,610,482 and
$39,655,200, respectively. There were no purchases and sales of U.S.
government obligations. In determining the net gain or loss on securities
sold, the cost of securities has been determined on the identified cost basis.
Note 4
Remarketed preferred shares
The Series A remarketed preferred shares are redeemable at the option of the
fund on any dividend payment date at a redemption price of $50,000 per share,
plus an amount equal to any dividends accumulated on a daily basis but unpaid
through the redemption date (whether or not such dividends have been declared)
and, in certain circumstances, a call premium.
It is anticipated that dividends paid to holders of remarketed preferred
shares will be considered tax-exempt dividends under the Internal Revenue Code
of 1986. To the extent that the fund earns taxable income and capital gains by
the conclusion of a fiscal year, it will be required to apportion to the
holders of the remarketed preferred shares throughout that year additional
dividends as necessary to result in an after-tax equivalent to the applicable
dividend rate for the period.
Under the Investment Company Act of 1940, the fund is required to maintain
asset coverage of at least 200% with respect to the remarketed preferred
shares as of the last business day of each month in which any such shares are
outstanding. Additionally, the fund is required to meet more stringent asset
coverage requirements under terms of the remarketed preferred shares and the
shares' rating agencies. Should these requirements not be met, or should
dividends accrued on the remarketed preferred shares not be paid, the fund may
be restricted in its ability to declare dividends to common shareholders or
may be required to redeem certain of the remarketed preferred shares. At March
31, 1998, no such restrictions have been placed on the fund.
Federal tax information
(Unaudited)
The fund has designated 100% of dividends paid from net investment income
during the fiscal year as tax exempt for Federal income tax purposes.
The Form 1099 you receive in January 1999 will show the tax status of all
distributions paid to your account in calendar 1998.
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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
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
John A. Hill
Ronald J. Jackson
Paul L. Joskow
Elizabeth T. Kennan
Lawrence J. Lasser
John H. Mullin III
Robert E. Patterson
Donald S. Perkins
George Putnam, III
A.J.C. Smith
W. Thomas Stephens
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
William J. Curtin
Vice President
Jerome J. Jacobs
Vice President
Blake E. Anderson
Vice President and Fund Manager
William N. Shiebler
Vice President
John R. Verani
Vice President
Beverly Marcus
Clerk and Assistant Treasurer
Call 1-800-225-1581 weekdays from 9 a.m. to 5 p.m. Eastern Time, or visit our
website (www.putnaminv.com) any time for up-to-date information about the
fund's NAV.
[LOGO OMITTED]
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
- --------------------
Bulk Rate
U.S. Postage
PAID
Putnam
Investments
- --------------------
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