Putnam
Mortgage Securities
Fund

Annual report
9 | 30 | 22

 

Message from the Trustees

November 11, 2022

Dear Fellow Shareholder:

Financial markets are reminding us that the journey to long-term returns often involves weathering periods of heightened volatility. This year, stocks and bonds have experienced losses, and U.S. gross domestic product has declined slightly. Persistent inflation has caused the U.S. Federal Reserve to raise interest rates to contain price pressures, an effort that may continue into 2023. At the same time, we are encouraged by recent economic data that suggests inflation rates are improving.

While this challenging environment is a test of patience, you can be confident that Putnam portfolio managers are actively working for you. As the prices of many stocks and bonds move lower, our teams are researching new and attractive investment opportunities for your fund while assessing risks.

We also would like to announce changes to the Board of Trustees. In July 2022, we welcomed Jennifer Williams Murphy and Marie Pillai as new Trustees. Both have a wealth of investment advisory and executive management experience. We also want to thank our Trustees who retired from the Board on June 30, 2022. Paul Joskow served with us since 1997, and Ravi Akhoury joined the Board in 2009. We wish them well.

Thank you for investing with Putnam.

Current performance may be lower or higher than the quoted past performance, which cannot guarantee future results. Share price, principal value, and return will fluctuate, and you may have a gain or a loss when you sell your shares. Performance of class A shares assumes reinvestment of distributions and does not account for taxes. Fund returns in the bar chart do not reflect a sales charge of 4.00%; had they, returns would have been lower. See page 3 and pages 9–11 for additional performance information. For a portion of the periods, the fund had expense limitations, without which returns would have been lower. To obtain the most recent month-end performance, visit putnam.com.

Before April 19, 2018, the fund was managed with a materially different investment strategy and may have achieved materially different performance results under its current investment strategy from that shown for periods before this date.

All Bloomberg indices are provided by Bloomberg Index Services Limited.

Lipper peer group median is provided by Lipper, a Refinitiv company.

* The Putnam Mortgage Securities Linked Benchmark represents the performance of the Bloomberg GNMA Index through April 18, 2018, and the performance of the Bloomberg U.S. MBS Index thereafter.

 

This comparison shows your fund’s performance in the context of broad market indexes for the 12 months ended 9/30/22. See page 2 and pages 9–11 for additional fund performance information. Index descriptions can be found on pages 16–17.

All Bloomberg indices are provided by Bloomberg Index Services Limited.

 

Mike, please describe investing conditions for the 12-month reporting period.

For much of the period, financial markets were challenged by multiple, converging risks in the macroeconomy. Rising inflation, slowing global growth, supply chain disruptions, and the Russia-Ukraine War weighed on investor sentiment.

Of these concerns, controlling inflation remained a top priority of the U.S. Federal Reserve. In November 2021, the Fed began tightening its crisis-driven monetary policy. It started to taper its $120-billion-per-month bond-buying program, paving the way for higher interest rates in calendar 2022.

After a relatively calm start to the new year, Russia’s invasion of Ukraine on February 24 caused a flight to safety. Energy and food insecurity in Europe drove up global commodity prices, stoking inflation. For the first time since 2008, the Fed raised interest rates, adding 0.25% to borrowing costs at its March 2022 meeting. The Fed signaled it could make additional interest-rate hikes at each of its remaining six policy meetings this year.

 

Allocations are shown as a percentage of the fund’s net assets as of 9/30/22. Cash and net other assets, if any, represent the market value weights of cash, derivatives, short-term securities, and other unclassified assets in the portfolio. Summary information may differ from the portfolio schedule included in the financial statements due to the inclusion of derivative securities, any interest accruals, the use of different classifications of securities for presentation purposes, and rounding. Allocations may not total 100% because the table includes the notional value (non-cash investments) of certain derivatives (the economic value for purposes of calculating periodic payment obligations), including to-be-announced mortgage security trades, if any, in addition to the market value of securities. Holdings and allocations may vary over time.

Credit qualities are shown as a percentage of the fund’s net assets as of 9/30/22. A bond rated BBB or higher (A-3 or higher, for short-term debt) is considered investment grade. This chart reflects the highest security rating provided by one or more of Standard & Poor’s, Moody’s, and Fitch. Ratings and portfolio credit quality will vary over time.

Cash and net other assets, if any, represent the market value weights of cash, derivatives, and short-term securities in the portfolio. The fund itself has not been rated by an independent rating agency. Data in the chart reflect a new calculation methodology put into effect on 6/30/22.

 

Stubborn inflation caused the Fed to raise interest rates four more times from May to September. The federal funds rate climbed from 0.00%–0.25% at the start of the period to 3.00%–3.25% as of period-end. Many investors feared that the Fed’s aggressive tactics to control inflation would tip the U.S. economy into a recession.

Credit spreads widened as interest rates rose. [Spreads are the yield advantage credit-sensitive bonds offer over comparable-maturity U.S. Treasuries. Bond prices rise as yield spreads tighten and decline as spreads widen.] The yield on the benchmark 10-year U.S. Treasury climbed from 1.52% at the start of the period to 3.83% at period-end. Short-term yields rose even more, causing the yield curve to flatten or invert at times.

How did the fund perform for the 12 months ended September 30, 2022?

The fund returned –14.96%, underperforming its primary benchmark, the Bloomberg U.S. MBS Index, which returned –13.98%.

Which holdings and strategies impacted fund performance relative to its primary benchmark?

Commercial mortgage-backed securities [CMBS] strategies contributed to fund performance. CMBS benefited from improving fundamentals in the commercial real estate sector, which experienced higher-than-anticipated payoff rates and refinancings during the period. However, the Fed’s hawkish rhetoric and geopolitical tensions began to impact markets more broadly. Our CMBS holdings continued to post returns but faced some weakness near period-end. The

ABOUT DERIVATIVES

Derivatives are an increasingly common type of investment instrument, the performance of which is derived from an underlying security, index, currency, or other area of the capital markets. Derivatives employed by the fund’s managers generally serve one of two main purposes: to implement a strategy that may be difficult or more expensive to invest in through traditional securities, or to hedge unwanted risk associated with a particular position.

For example, the fund’s managers may identify a bond that they believe is undervalued relative to its risk of default, but may seek to reduce the interest-rate risk of that bond by using interest-rate swaps, a derivative through which two parties “swap” payments based on the movement of certain rates.

Like any other investment, derivatives may not appreciate in value and may lose money. Derivatives may amplify traditional investment risks through the creation of leverage and may be less liquid than traditional securities. Because derivatives typically represent contractual agreements between two financial institutions, derivatives entail “counterparty risk,” which is the risk that the other party is unable or unwilling to pay. Putnam monitors the counterparty risks we assume. For example, Putnam often enters into collateral agreements that require the counterparties to post collateral on a regular basis to cover their obligations to the fund. Counterparty risk for exchange-traded futures and centrally cleared swaps is generally mitigated by the daily exchange of margin and other safeguards against default through their respective clearinghouses.

 

portfolio’s positioning in more seasoned deals, which have shorter maturities and have less exposure to broader market risks, helped boost CMBS returns.

What about detractors for the reporting period?

Interest-rate and yield curve positioning detracted from fund performance. The fund’s duration positioning and quantitative model weighed on performance as Treasury yields rose sharply and interest-rate volatility remained elevated.

Prepayment strategies also detracted from performance. Prepayment speeds were elevated early in the period. Late-cycle refinance dynamics were stronger and lasted longer than in previous cycles. This led investors to model elevated prepayment speeds out into the foreseeable future. Technical pressures within the market also caused a price markdown in securities, and spreads continued to widen on macro-driven volatility.

Exposure to residential mortgage credit, led by credit risk transfer [CRT] securities, detracted slightly from relative performance. CRTs were impacted by macro-driven volatility and a lack of liquidity in the sector.

How were derivatives used during the period?

We used futures and interest-rate swaps to help hedge Treasury term structure risk and for yield curve positioning. Options also provided a means to hedge duration and convexity, isolate prepayment risk, and manage downside risks. Credit default swaps helped to hedge credit and market risks, and gain exposure to specific sectors. Total return swaps were also used to gain exposure to specific sectors and hedge sector exposure.

What are your current views on the various sectors in which the fund invests?

Our outlook for commercial real estate is mixed. We believe commercial mortgages are benefiting from more people returning to offices, shopping, and travel. At the same time, additional interest-rate hikes could push the U.S. economy into a recession. Against this backdrop, property types that can pass along inflation costs to the consumer, such as hotels

This chart illustrates the fund’s composition by maturity, showing the percentage of holdings in different maturity ranges and how the composition has changed over the past six months. Holdings and maturity ranges may vary over time. A negative number represents cash to be allocated to to-be-announced agency pass-through mortgage-backed securities, which the fund has agreed to purchase.

 

and apartments, will hold their value, in our view. We believe property types with longer leases and exposure to rising capital costs will face pressure. Year-to-date macro-driven volatility pushed spreads wider across the sector, creating opportunities for security selection, in our view.

U.S. housing prices soared to record highs during the pandemic. We expect home prices will decline in calendar 2023, followed by tepid growth thereafter. We believe houses will be pressured by continued affordability based on demand and a gradual increase in supply. We see value in non-agency mortgage-backed securities higher in the capital structure, and in bonds backed by more seasoned collateral that can withstand home price declines.

We believe many prepayment-sensitive securities may offer attractive risk-adjusted returns. These securities have the potential for meaningful upside if mortgage prepayment speeds slow further, in our view. These securities provide an important source of diversification in our portfolio and can benefit from a slowdown in the economy or housing market.

What is the team’s near-term outlook?

Overall, we have a cautiously optimistic outlook. If the Fed maintains its hawkish tightening path, we believe the risk of recession remains high. Its timing and depth will depend on how quickly the Fed reacts to visible signs of an emerging recession, in our view. We believe this would likely lead to a modest rise in unemployment and a tepid housing market. We do not believe risk markets have fully priced in recessionary risk. We anticipate volatility will remain elevated in the near term. We prefer to maintain a lower level of risk in this environment but would selectively take advantage of attractive opportunities as they arise.

Thank you, Mike, for your time and insights today.

The views expressed in this report are exclusively those of Putnam Management and are subject to change. They are not meant as investment advice.

Please note that the holdings discussed in this report may not have been held by the fund for the entire period. Portfolio composition is subject to review in accordance with the fund’s investment strategy and may vary in the future. Current and future portfolio holdings are subject to risk.

 

Your fund’s performance

This section shows your fund’s performance, price, and distribution information for periods ended September 30, 2022, the end of its most recent fiscal year. In accordance with regulatory requirements for mutual funds, we also include expense information taken from the fund’s current prospectus. Performance should always be considered in light of a fund’s investment strategy. Data represent past performance. Past performance does not guarantee future results. More recent returns may be less or more than those shown. Investment return and principal value will fluctuate, and you may have a gain or a loss when you sell your shares. Performance information does not reflect any deduction for taxes a shareholder may owe on fund distributions or on the redemption of fund shares. For the most recent month-end performance, please visit the Individual Investors section at putnam.com or call Putnam at 1-800-225-1581. Class R, R6, and Y shares are not available to all investors. See the Terms and definitions section in this report for definitions of the share classes offered by your fund.

Annualized fund performance Total return for periods ended 9/30/22

 

Current performance may be lower or higher than the quoted past performance, which cannot guarantee future results. After-sales-charge returns for class A shares reflect the deduction of the maximum 4.00% sales charge levied at the time of purchase. Class B share returns after contingent deferred sales charge (CDSC) reflect the applicable CDSC, which is 5% in the first year, declining over time to 1% in the sixth year, and is eliminated thereafter. Class C share returns after CDSC reflect a 1% CDSC for the first year that is eliminated thereafter. Class R, R6, and Y shares have no initial sales charge or CDSC. Performance for class B, C, R, and Y shares before their inception is derived from the historical performance of class A shares, adjusted for the applicable sales charge (or CDSC) and the higher operating expenses for such shares, except for class Y shares, for which 12b-1 fees are not applicable. Performance for class R6 shares prior to their inception is derived from the historical performance of class Y shares and has not been adjusted for the lower investor servicing fees applicable to class R6 shares; had it, returns would have been higher.

Before April 19, 2018, the fund was managed with a materially different investment strategy and may have achieved materially different performance results under its current investment strategy from that shown for periods before this date.

For a portion of the periods, the fund had expense limitations, without which returns would have been lower.

Class B and C share performance reflects conversion to class A shares after eight years.

 

Comparative annualized index returns For periods ended 9/30/22

 

Index and Lipper results should be compared with fund performance before sales charge, before CDSC, or at net asset value.

All Bloomberg indices are provided by Bloomberg Index Services Limited.

Lipper peer group median is provided by Lipper, a Refinitiv company.

^* The Putnam Mortgage Securities Linked Benchmark represents the performance of the Bloomberg GNMA Index through April 18, 2018, and the performance of the Bloomberg U.S. MBS Index thereafter.

^† Over the 1-year, 3-year, 5-year, 10-year, and life-of-fund periods ended 9/30/22, there were 153, 138, 115, 86, and 3 funds, respectively, in this Lipper category.

Past performance does not indicate future results. At the end of the same time period, a $10,000 investment in the fund’s class B and C shares would have been valued at $9,247 and $9,231, respectively, and no contingent deferred sales charges would apply. A $10,000 investment in the fund’s class R, R6, and Y shares would have been valued at $9,553, $10,107 and $10,047, respectively.

All Bloomberg indices are provided by Bloomberg Index Services Limited.

^* The Putnam Mortgage Securities Linked Benchmark represents the performance of the Bloomberg GNMA Index through April 18, 2018, and the performance of the Bloomberg U.S. MBS Index thereafter.

 

Fund price and distribution information For the 12-month period ended 9/30/22

 

The classification of distributions, if any, is an estimate. Before-sales-charge share value and current dividend rate for class A shares, if applicable, do not take into account any sales charge levied at the time of purchase. After-sales-charge share value, current dividend rate, and current 30-day SEC yield, if applicable, are calculated assuming that the maximum sales charge (4.00% for class A shares) was levied at the time of purchase. Final distribution information will appear on your year-end tax forms.

¹ Most recent distribution, including any return of capital and excluding capital gains, annualized and divided by share price before or after sales charge at period-end.

² Based only on investment income and calculated using the maximum offering price for each share class, in accordance with SEC guidelines.

 

Your fund’s expenses

As a mutual fund investor, you pay ongoing expenses, such as management fees, distribution fees (12b-1 fees), and other expenses. In the most recent six-month period, your fund’s expenses were limited; had expenses not been limited, they would have been higher. Using the following information, you can estimate how these expenses affect your investment and compare them with the expenses of other funds. You may also pay one-time transaction expenses, including sales charges (loads) and redemption fees, which are not shown in this section and would have resulted in higher total expenses. For more information, see your fund’s prospectus or talk to your financial representative.

Expense ratios

 

Fiscal year expense information in this table is taken from the most recent prospectus, is subject to change, and may differ from that shown for the annualized expense ratio and in the financial highlights of this report.

Expenses are shown as a percentage of average net assets.

^* Expense ratios for each class are for the fund’s most recent fiscal half year. As a result of this, ratios may differ from expense ratios based on one-year data in the financial highlights.

Expenses per $1,000

The following table shows the expenses you would have paid on a $1,000 investment in each class of the fund from 4/1/22 to 9/30/22. It also shows how much a $1,000 investment would be worth at the close of the period, assuming actual returns and expenses.

 

^* Expenses for each share class are calculated using the fund’s annualized expense ratio for each class, which represents the ongoing expenses as a percentage of average net assets for the six months ended 9/30/22. The expense ratio may differ for each share class.

^† Expenses are calculated by multiplying the expense ratio by the average account value for the period; then multiplying the result by the number of days in the period (183); and then dividing that result by the number of days in the year (365).

 

Estimate the expenses you paid

To estimate the ongoing expenses you paid for the six months ended 9/30/22, use the following calculation method. To find the value of your investment on 4/1/22, call Putnam at 1-800-225-1581.

Compare expenses using the SEC’s method

The Securities and Exchange Commission (SEC) has established guidelines to help investors assess fund expenses. Per these guidelines, the following table shows your fund’s expenses based on a $1,000 investment, assuming a hypothetical 5% annualized return. You can use this information to compare the ongoing expenses (but not transaction expenses or total costs) of investing in the fund with those of other funds. All mutual fund shareholder reports will provide this information to help you make this comparison. Please note that you cannot use this information to estimate your actual ending account balance and expenses paid during the period.

 

^* Expenses for each share class are calculated using the fund’s annualized expense ratio for each class, which represents the ongoing expenses as a percentage of average net assets for the six months ended 9/30/22. The expense ratio may differ for each share class.

^† Expenses are calculated by multiplying the expense ratio by the average account value for the six-month period; then multiplying the result by the number of days in the six-month period (183); and then dividing that result by the number of days in the year (365).

 

Consider these risks before investing

Funds that invest in government securities are not guaranteed. Mortgage- and asset-backed securities are subject to prepayment risk, which means that they may increase in value less than other bonds when interest rates decline and decline in value more than other bonds when interest rates rise. The fund may have to invest the proceeds from prepaid investments, including mortgage- and asset-backed investments, in other investments with less attractive terms and yields.

The fund’s investments in mortgage-backed securities and asset-backed securities, and in certain other securities and derivatives, may be or become illiquid. The fund’s exposure to privately issued mortgage-backed securities and mortgage-backed securities issued or guaranteed by the U.S. government or its agencies or instrumentalities may make the fund’s net asset value more susceptible to economic, market, political, and other developments affecting the housing or real estate markets. The fund currently has significant investment exposure to commercial mortgage-backed securities. Bond investments are subject to interest-rate risk (the risk of bond prices falling if interest rates rise) and credit risk (the risk of an issuer defaulting on interest or principal payments). Interest-rate risk is generally greater for longer-term bonds, and credit risk is generally greater for below-investment-grade bonds. Default risk is generally higher for non-qualified mortgages. Risks associated with derivatives include increased investment exposure (which may be considered leverage) and, in the case of over-the-counter instruments, the potential inability to terminate or sell derivatives positions and the potential failure of the other party to the instrument to meet its obligations. Unlike bonds, funds that invest in bonds have fees and expenses. The value of investments in the fund’s portfolio may fall or fail to rise over extended periods of time for a variety of reasons, including general economic, political, or financial market conditions; investor sentiment and market perceptions; government actions; geopolitical events or changes; and factors related to a specific issuer, geography (such as a region of the United States), industry, or sector (such as the housing or real estate markets). These and other factors may lead to increased volatility and reduced liquidity in the fund’s portfolio holdings or in relevant markets.

Our investment techniques, analyses, and judgments may not produce the outcome we intend. We, or the fund’s other service providers, may experience disruptions or operating errors that could have a negative effect on the fund. You can lose money by investing in the fund.

 

Terms and definitions

Important terms

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.

Before sales charge, or net asset value, is the price, or value, of one share of a mutual fund, without a sales charge. Before-sales-charge figures fluctuate with market conditions. They are calculated by dividing the net assets of each class of shares by the number of outstanding shares in the class.

After sales charge is the price of a mutual fund share plus the maximum sales charge levied at the time of purchase. After-sales-charge performance figures shown here assume the 4.00% maximum sales charge for class A shares.

Contingent deferred sales charge (CDSC) is generally a charge applied at the time of the redemption of class B or C shares and assumes redemption at the end of the period. Your fund’s class B CDSC declines over time from a 5% maximum during the first year to 1% during the sixth year. After the sixth year, the CDSC no longer applies. The CDSC for class C shares is 1% for one year after purchase.

Share classes

Class A shares are generally subject to an initial sales charge and no CDSC (except on certain redemptions of shares bought without an initial sales charge).

Class B shares are closed to new investments and are only available by exchange from class B shares of another Putnam fund or through dividend and/or capital gains reinvestment. They are not subject to an initial sales charge and may be subject to a CDSC.

Class C shares are not subject to an initial sales charge and are subject to a CDSC only if the shares are redeemed during the first year.

Class R shares are not subject to an initial sales charge or CDSC and are only available to employer-sponsored retirement plans.

Class R6 shares are not subject to an initial sales charge or CDSC and carry no 12b-1 fee. They are generally only available to employer-sponsored retirement plans, corporate and institutional clients, and clients in other approved programs.

Class Y shares are not subject to an initial sales charge or CDSC and carry no 12b-1 fee. They are generally only available to corporate and institutional clients and clients in other approved programs.

Fixed income terms

Current rate is the annual rate of return earned from dividends or interest of an investment. Current rate is expressed as a percentage of the price of a security, fund share, or principal investment.

Mortgage-backed security (MBS), also known as a mortgage “pass-through,” is a type of asset-backed security that is secured by a mortgage or collection of mortgages. The following are types of MBSs:

• Agency credit risk transfer (CRT) security is backed by a reference pool of agency mortgages. Unlike a regular agency pass-through, the principal invested in a CRT is not backed by a U.S. government agency. To compensate investors for this risk, a CRT typically offers a higher yield than conventional pass-through securities. Similar to a CMBS, a CRT is structured into various tranches for investors, offering different levels of risk and yield based on the underlying reference pool.

• Agency “pass-through” has its principal and interest backed by a U.S. government agency, such as the Federal National Mortgage Association (Fannie Mae), Government National Mortgage Association

 

(Ginnie Mae), and Federal Home Loan Mortgage Corporation (Freddie Mac).

• Collateralized mortgage obligation (CMO) represents claims to specific cash flows from pools of home mortgages. The streams of principal and interest payments on the mortgages are distributed to the different classes of CMO interests in “tranches.” Each tranche may have different principal balances, coupon rates, prepayment risks, and maturity dates. A CMO is highly sensitive to changes in interest rates and any resulting change in the rate at which homeowners sell their properties, refinance, or otherwise prepay loans. CMOs are subject to prepayment, market, and liquidity risks.

◦ Interest-only (IO) security is a type of CMO in which the underlying asset is the interest portion of mortgage, Treasury, or bond payments.

• Non-agency residential mortgage-backed security (RMBS) is an MBS not backed by Fannie Mae, Ginnie Mae, or Freddie Mac. One type of RMBS is an Alt-A mortgage-backed security.

• Commercial mortgage-backed security (CMBS) is secured by the loan on a commercial property.

• CMBS mezzanine tranches are securities positioned between a senior tranche (mostly rated AAA) and a subordinated tranche (unrated, typically called an equity tranche). The mezzanine tranches are typically rated between AA and B because they are more exposed to credit risk than the senior tranches, and thus generally carry a higher yield.

Yield curve is a graph that plots the yields of bonds with equal credit quality against their differing maturity dates, ranging from shortest to longest. It is used as a benchmark for other debt, such as mortgage or bank lending rates.

Comparative indexes

Bloomberg GNMA Index is an unmanaged index of Government National Mortgage Association bonds.

Bloomberg U.S. Aggregate Bond Index is an unmanaged index of U.S. investment-grade fixed income securities.

Bloomberg U.S. MBS Index is an unmanaged index of agency mortgage-backed pass-through securities guaranteed by Ginnie Mae (GNMA), Fannie Mae (FNMA), and Freddie Mac (FHLMC).

ICE BofA (Intercontinental Exchange Bank of America) U.S. 3-Month Treasury Bill Index is an unmanaged index that seeks to measure the performance of U.S. Treasury bills available in the marketplace.

Putnam Mortgage Securities Linked Benchmark represents the performance of the Bloomberg GNMA Index through April 18, 2018, and the performance of the Bloomberg U.S. MBS Index thereafter.

S&P 500^® Index is an unmanaged index of common stock performance.

Indexes assume reinvestment of all distributions and do not account for fees. Securities and performance of a fund and an index will differ. You cannot invest directly in an index.

BLOOMBERG^®  is a trademark and service mark of Bloomberg Finance L.P. and its affiliates (collectively “Bloomberg”). Bloomberg or Bloomberg’s licensors own all proprietary rights in the Bloomberg Indices. Neither Bloomberg nor Bloomberg’s licensors approve or endorse this material, or guarantee the accuracy or completeness of any information herein, or make any warranty, express or implied, as to the results to be obtained therefrom, and to the maximum extent allowed by law, neither shall have any liability or responsibility for injury or damages arising in connection therewith.

ICE Data Indices, LLC (“ICE BofA”), used with permission. ICE BofA permits use of the ICE BofA indices and related data on an “as is” basis; makes no warranties regarding same; does not guarantee the suitability, quality, accuracy, timeliness, and/or completeness of the ICE BofA indices or any data included in, related to, or derived therefrom; assumes no liability in connection with the use of the foregoing; and does not sponsor, endorse, or recommend Putnam Investments, or any of its products or services.

 

Lipper, a Refinitiv company, is a third-party industry-ranking entity that ranks mutual funds. Its rankings do not reflect sales charges. Lipper rankings are based on total return at net asset value relative to other funds that have similar current investment styles or objectives as determined by Lipper. Lipper may change a fund’s category assignment at its discretion. Lipper category medians reflect performance trends for funds within a category.

Other information for shareholders

Proxy voting

Putnam is committed to managing our mutual funds in the best interests of our shareholders. The Putnam funds’ proxy voting guidelines and procedures, as well as information regarding how your fund voted proxies relating to portfolio securities during the 12-month period ended June 30, 2022, are available in the Individual Investors section of putnam.com and on the Securities and Exchange Commission (SEC) website, www.sec.gov. If you have questions about finding forms on the SEC’s website, you may call the SEC at 1-800-SEC-0330. You may also obtain the Putnam funds’ proxy voting guidelines and procedures at no charge by calling Putnam’s Shareholder Services at 1-800-225-1581.

Fund portfolio holdings

The fund will file a complete schedule of its portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-PORT within 60 days of the end of such fiscal quarter. Shareholders may obtain the fund’s Form N-PORT on the SEC’s website at www.sec.gov.

Prior to its use of Form N-PORT, the fund filed its complete schedule of its portfolio holdings with the SEC on Form N-Q, which is available online at www.sec.gov.

Trustee and employee fund ownership

Putnam employees and members of the Board of Trustees place their faith, confidence, and, most importantly, investment dollars in Putnam mutual funds. As of September 30, 2022, Putnam employees had approximately $428,000,000 and the Trustees had approximately $57,000,000 invested in Putnam mutual funds. These amounts include investments by the Trustees’ and employees’ immediate family members as well as investments through retirement and deferred compensation plans.

Liquidity risk management program

Putnam, as the administrator of the fund’s liquidity risk management program (appointed by the Board of Trustees), presented the most recent annual report on the program to the Trustees in April 2022. The report covered the structure of the program, including the program documents and related policies and procedures adopted to comply with Rule 22e-4 under the Investment Company Act of 1940, and reviewed the operation of the program from January 2021 through December 2021. The report included a description of the annual liquidity assessment of the fund that Putnam performed in November 2021. The report noted that there were no material compliance exceptions identified under Rule 22e-4 during the period. The report included a review of the governance of the program and the methodology for classification of the fund’s investments. The report also included a discussion of liquidity monitoring during the period, including during the market liquidity challenges caused by the Covid-19 pandemic, and the impact those challenges had on the liquidity of the fund’s investments. Putnam concluded that the program has been operating effectively and adequately to ensure compliance with Rule 22e-4.

 

Important notice regarding Putnam’s privacy policy

In order to conduct business with our shareholders, we must obtain certain personal information such as account holders’ names, addresses, Social Security numbers, and dates of birth. Using this information, we are able to maintain accurate records of accounts and transactions.

It is our policy to protect the confidentiality of our shareholder information, whether or not a shareholder currently owns shares of our funds. In particular, it is our policy not to sell information about you or your accounts to outside marketing firms. We have safeguards in place designed to prevent unauthorized access to our computer systems and procedures to protect personal information from unauthorized use.

Under certain circumstances, we must share account information with outside vendors who provide services to us, such as mailings and proxy solicitations. In these cases, the service providers enter into confidentiality agreements with us, and we provide only the information necessary to process transactions and perform other services related to your account. Finally, it is our policy to share account information with your financial representative, if you’ve listed one on your Putnam account.

 

Trustee approval of management contract

General conclusions

The Board of Trustees of The Putnam Funds oversees the management of each fund and, as required by law, determines annually whether to approve the continuance of your fund’s management contract with Putnam Investment Management, LLC (“Putnam Management”) and the sub-management contract with respect to your fund between Putnam Management and its affiliate, Putnam Investments Limited (“PIL”). The Board, with the assistance of its Contract Committee, requests and evaluates all information it deems reasonably necessary under the circumstances in connection with its annual contract review. The Contract Committee consists solely of Trustees who are not “interested persons” (as this term is defined in the Investment Company Act of 1940, as amended (the “1940 Act”)) of The Putnam Funds (“Independent Trustees”).

At the outset of the review process, members of the Board’s independent staff and independent legal counsel considered any possible changes to the annual contract review materials furnished to the Contract Committee during the course of the previous year’s review and, as applicable, identified those changes to Putnam Management. Following these discussions and in consultation with the Contract Committee, the Independent Trustees’ independent legal counsel requested that Putnam Management and its affiliates furnish specified information, together with any additional information that Putnam Management considered relevant, to the Contract Committee. Over the course of several months ending in June 2022, the Contract Committee met on a number of occasions with representatives of Putnam Management, and separately in executive session, to consider the information that Putnam Management provided. Throughout this process, the Contract Committee was assisted by the members of the Board’s independent staff and by independent legal counsel for The Putnam Funds and the Independent Trustees.

In May 2022, the Contract Committee met in executive session to discuss and consider its recommendations with respect to the continuance of the contracts. At the Trustees’ June 2022 meeting, the Contract Committee met in executive session with the other Independent Trustees to review a summary of the key financial, performance and other data that the Contract Committee considered in the course of its review. The Contract Committee then presented its written report, which summarized the key factors that the Committee had considered and set forth its recommendations. The Contract Committee recommended, and the Independent Trustees approved, the continuance of your fund’s management contract and the approval of your fund’s amended and restated sub-management contract, effective July 1, 2022. (Because PIL is an affiliate of Putnam Management and Putnam Management remains fully responsible for all services provided by PIL, the Trustees have not attempted to evaluate PIL as a separate entity, and all subsequent references to Putnam Management below should be deemed to include reference to PIL as necessary or appropriate in the context.)

The Independent Trustees’ approval was based on the following conclusions:

• That the fee schedule in effect for your fund represented reasonable compensation in light of the nature and quality of the services being provided to the fund, the fees paid by competitive funds, the costs incurred by Putnam Management in providing services to the fund and the application of certain reductions and waivers noted below; and

• That the fee schedule in effect for your fund represented an appropriate sharing between fund shareholders and Putnam Management of any economies of scale as may exist in the management of the fund at current asset levels.

These conclusions were based on a comprehensive consideration of all information provided to the Trustees and were not the result of any single factor. Some of the factors that figured particularly in the Trustees’ deliberations and how the Trustees considered these factors are described below, although individual Trustees may have evaluated the information presented differently, giving different weights to various factors. It is also important to recognize that the management arrangements for your fund and the other Putnam funds are the result of many years of review and discussion between the Independent Trustees and Putnam Management, that some aspects of the arrangements may receive greater scrutiny in some years than others and that the Trustees’ conclusions may be based, in part, on their consideration of fee arrangements in previous years. For example,

 

with certain exceptions primarily involving newer or repositioned funds, the current fee arrangements under the vast majority of the funds’ management contracts were first implemented at the beginning of 2010 following extensive review by the Contract Committee and discussions with representatives of Putnam Management, as well as approval by shareholders.

Management fee schedules and total expenses

The Trustees reviewed the management fee schedules in effect for all Putnam funds, including fee levels and breakpoints. Under its management contract, your fund has the benefit of breakpoints in its management fee schedule that provide shareholders with reduced fee levels as assets under management in the Putnam family of funds increase. The Trustees also reviewed the total expenses of each Putnam fund, recognizing that in most cases management fees represented the major, but not the sole, determinant of total costs to fund shareholders. (Two funds have implemented so-called “all-in” management fees covering substantially all routine fund operating costs.) The Trustees considered that the proposed amended and restated sub-management contract would lower the sub-management fees paid by Putnam Management to PIL.

In reviewing fees and expenses, the Trustees generally focus their attention on material changes in circumstances — for example, changes in assets under management, changes in a fund’s investment strategy, changes in Putnam Management’s operating costs or profitability, or changes in competitive practices in the mutual fund industry — that suggest that consideration of fee changes might be warranted. The Trustees concluded that the circumstances did not indicate that changes to the management fee schedule for your fund would be appropriate at this time.

As in the past, the Trustees also focused on the competitiveness of each fund’s total expense ratio. The Trustees and Putnam Management and the funds’ investor servicing agent, Putnam Investor Services, Inc. (“PSERV”), have implemented expense limitations that were in effect during your fund’s fiscal year ending in 2021. These expense limitations were: (i) a contractual expense limitation applicable to specified open-end funds, including your fund, of 25 basis points on investor servicing fees and expenses and (ii) a contractual expense limitation applicable to specified open-end funds, including your fund, of 20 basis points on so-called “other expenses” (i.e., all expenses exclusive of management fees, distribution fees, investor servicing fees, investment-related expenses, interest, taxes, brokerage commissions, acquired fund fees and expenses and extraordinary expenses). These expense limitations attempt to maintain competitive expense levels for the funds. Most funds, including your fund, had sufficiently low expenses that these expense limitations were not operative during their fiscal years ending in 2021. Putnam Management and PSERV have agreed to maintain these expense limitations until at least January 30, 2024. Putnam Management and PSERV’s commitment to these expense limitation arrangements, which were intended to support an effort to have fund expenses meet competitive standards, was an important factor in the Trustees’ decision to approve the continuance of your fund’s management contract and to approve your fund’s amended and restated sub-management contract. In addition, during its fiscal year ending in 2021, your fund’s expenses were reduced as a result of Putnam Management’s contractual agreement to waive fees and/or reimburse expenses of your fund to the extent that expenses of the fund (excluding payments under the fund’s distribution plans, investor servicing fees, brokerage, interest, taxes, investment-related expenses, extraordinary expenses and acquired fund fees and expenses) exceeded an annual rate of 0.32% of its average net assets. Effective July 1, 2021, this fund-specific expense limitation was no longer operative.

The Trustees reviewed comparative fee and expense information for a custom group of competitive funds selected by Broadridge Financial Solutions, Inc. (“Broadridge”). This comparative information included your fund’s percentile ranking for effective management fees and total expenses (excluding any applicable 12b-1 fees), which provides a general indication of your fund’s relative standing. In the custom peer group, your fund ranked in the second quintile in effective management fees (determined for your fund and the other funds in the custom peer group based on fund asset size and the applicable contractual management fee schedule) and in the first quintile in total expenses (excluding any applicable 12b-1 fees) as of December 31, 2021. The Trustees also considered that, as of December 31, 2021, your fund ranked in the second quintile in effective management fees (determined for your fund and the other funds in the custom peer group based on fund asset size and the applicable contractual management fee schedule) and in

 

the third quintile in total expenses (excluding any applicable 12b-1 fees) on a pro forma basis, adjusted to reflect the removal of the fund-specific expense limitation for your fund. The first quintile represents the least expensive funds and the fifth quintile the most expensive funds. The fee and expense data reported by Broadridge as of December 31, 2021 reflected the most recent fiscal year-end data available in Broadridge’s database at that time.

In connection with their review of fund management fees and total expenses, the Trustees also reviewed the costs of the services provided and the profits realized by Putnam Management and its affiliates from their contractual relationships with the funds. This information included trends in revenues, expenses and profitability of Putnam Management and its affiliates relating to the investment management, investor servicing and distribution services provided to the funds. In this regard, the Trustees also reviewed an analysis of the revenues, expenses and profitability of Putnam Management and its affiliates, allocated on a fund-by-fund basis, with respect to the funds’ management, distribution and investor servicing contracts. For each fund, the analysis presented information about revenues, expenses and profitability for each of the agreements separately and for the agreements taken together on a combined basis. The Trustees concluded that, at current asset levels, the fee schedules in place for the Putnam funds, including the fee schedule for your fund, represented reasonable compensation for the services being provided and represented an appropriate sharing between fund shareholders and Putnam Management of any economies of scale as may exist in the management of the Putnam funds at that time.

The information examined by the Trustees in connection with their annual contract review for the Putnam funds included information regarding services provided and fees charged by Putnam Management and its affiliates to other clients, including collective investment trusts offered in the defined contribution and defined benefit retirement plan markets, sub-advised mutual funds, private funds sponsored by affiliates of Putnam Management, model-only separately managed accounts and Putnam Management’s exchange-traded funds. This information included, in cases where a product’s investment strategy corresponds with a fund’s strategy, comparisons of those fees with fees charged to the Putnam funds, as well as an assessment of the differences in the services provided to these clients as compared to the services provided to the Putnam funds. The Trustees observed that the differences in fee rates between these clients and the Putnam funds are by no means uniform when examined by individual asset sectors, suggesting that differences in the pricing of investment management services to these types of clients may reflect, among other things, historical competitive forces operating in separate marketplaces. The Trustees considered the fact that in many cases fee rates across different asset classes are higher on average for mutual funds than for other clients, and the Trustees also considered the differences between the services that Putnam Management provides to the Putnam funds and those that it provides to its other clients. The Trustees did not rely on these comparisons to any significant extent in concluding that the management fees paid by your fund are reasonable.

Investment performance

The quality of the investment process provided by Putnam Management represented a major factor in the Trustees’ evaluation of the quality of services provided by Putnam Management under your fund’s management contract. The Trustees were assisted in their review of Putnam Management’s investment process and performance by the work of the investment oversight committees of the Trustees and the full Board of Trustees, which meet on a regular basis with individual portfolio managers and with senior management of Putnam Management’s Investment Division throughout the year. The Trustees concluded that Putnam Management generally provides a high-quality investment process — based on the experience and skills of the individuals assigned to the management of fund portfolios, the resources made available to them and in general Putnam Management’s ability to attract and retain high-quality personnel — but also recognized that this does not guarantee favorable investment results for every fund in every time period.

The Trustees considered that, in the aggregate, the Putnam funds’ performance was generally solid in 2021 against a backdrop of strong U.S. economic and financial market growth. The Trustees considered Putnam Management’s observation that, despite an environment of generally strong growth, there had been various headwinds experienced in 2021. For the one-year period ended December 31, 2021, the Trustees

 

noted that the Putnam funds, on an asset-weighted basis, ranked in the 52nd percentile of their peers as determined by Lipper Inc. (“Lipper”) and, on an asset-weighted-basis, delivered a gross return that trailed their benchmarks by 0.1%. Over the longer-term, the Committee noted that, on an asset-weighted basis, the Putnam funds delivered strong aggregate performance relative to their Lipper peers over the three-, five- and ten-year periods ended December 31, 2021, ranking in the 31st, 29th and 21st percentiles, respectively, and that the funds, in the aggregate, outperformed their benchmarks on a gross basis for each of those periods.

In addition to the performance of the individual Putnam funds, the Trustees considered, as they had in prior years, the performance of The Putnam Fund complex versus competitor fund complexes. In particular, the Trustees considered The Putnam Fund complex’s performance as reported in the Barron’s/Lipper Fund Families survey (the “Survey”), which ranks mutual fund companies based on their performance across a variety of asset types. The Trustees noted that The Putnam Fund complex continued to rank highly in the Survey, especially over the longer-term, with The Putnam Funds ranking as the 6th best performing mutual fund complex out of 45 complexes for the ten-year period and 13th out of 49 complexes for the five-year period. The Trustees noted that 2021 marked the fifth consecutive year that The Putnam Funds have ranked in the top ten fund complexes for the ten-year period. The Trustees also considered that The Putnam Fund complex’s Survey performance over the one-year period was solid, with The Putnam Funds ranking 27th out of 51 complexes. In addition to the Survey, the Trustees also considered the Putnam funds’ ratings assigned by Morningstar Inc., noting that 25 of the funds were four- or five-star rated at the end of 2021 (representing a decrease of one fund year-over-year) and that this included nine funds that had achieved a five-star rating (representing an increase of two funds year-over-year). They also noted, however, the disappointing investment performance of some Putnam funds for periods ended December 31, 2021 and considered information provided by Putnam Management regarding the factors contributing to the underperformance and actions being taken to improve the performance of these particular funds. The Trustees indicated their intention to continue to monitor closely the performance of those funds and evaluate whether additional actions to address areas of underperformance may be warranted.

For purposes of the Trustees’ evaluation of the Putnam funds’ investment performance, the Trustees generally focus on a competitive industry ranking of each fund’s total net return over a one-year, three-year and five-year period. For a number of Putnam funds with relatively unique investment mandates for which Putnam Management informed the Trustees that meaningful competitive performance rankings are not considered to be available, the Trustees evaluated performance based on their total gross and net returns and comparisons of those returns to the returns of selected investment benchmarks. In the case of your fund, the Trustees considered that its class A share cumulative total return performance at net asset value was in the following quartiles of its Lipper peer group (Lipper U.S. Mortgage Funds) for the one-year, three-year and five-year periods ended December 31, 2021 (the first quartile representing the best-performing funds and the fourth quartile the worst-performing funds):

 

Over the one-year, three-year and five-year periods ended December 31, 2021, there were 136, 123 and 109 funds, respectively, in your fund’s Lipper peer group. (When considering performance information, shareholders should be mindful that past performance is not a guarantee of future results.)

The Trustees expressed concern about your fund’s fourth quartile performance over the one-year, three-year and five-year periods ended December 31, 2021 (the fund was repositioned on April 19, 2018 and, therefore, the fund’s performance prior to that date occurred when the fund was managed with a materially different investment strategy) and considered the circumstances that may have contributed to this disappointing performance. The Trustees considered Putnam Management’s observation that significant underperformance in the securitized products sector in 2021 had contributed to the fund’s disappointing results, noting that prepayment strategies had suffered as a result of significantly elevated refinancing (given strong home price appreciation and low interest rates) relative to expectations. The Trustees considered that the fund’s underperformance was also driven by significant underperformance in the securitized products

 

sector in 2020, which resulted from the outsized impact of the COVID-19 pandemic on the commercial mortgage sector. In addition, the Trustees considered the negative impact that the fund’s term structure strategies had on performance in 2021 and Putnam Management’s observation that term structure strategies had positively contributed to the fund’s performance in 2019 and 2020 and over the three-year period ended December 31, 2021.

The Trustees considered Putnam Management’s observation that a number of the investment strategies that had detracted from the fund’s performance had begun to recover as of March 31, 2022 and that the fund had top quartile performance year to date relative to its peers, as of March 31, 2022. The Trustees noted that Putnam Management remained confident in the fund’s portfolio managers. The Trustees also considered Putnam Management’s continued efforts to support fund performance through certain initiatives, including structuring compensation for portfolio managers to enhance accountability for fund performance, emphasizing accountability in the portfolio management process and affirming its commitment to a fundamental-driven approach to investing. The Trustees noted further that Putnam Management had made selective hires and internal promotions in 2021 to strengthen its investment team.

As a general matter, the Trustees believe that cooperative efforts between the Trustees and Putnam Management represent the most effective way to address investment performance concerns that may arise from time to time. The Trustees noted that investors in the Putnam funds have, in effect, placed their trust in the Putnam organization, under the oversight of the funds’ Trustees, to make appropriate decisions regarding the management of the funds. The Trustees also considered that Putnam Management has made changes in light of subpar investment performance when warranted. Based on Putnam Management’s willingness to take appropriate measures to address fund performance issues, the Trustees concluded that it continued to be advisable to seek change within Putnam Management to address performance shortcomings. In the Trustees’ view, the alternative of engaging a new investment adviser for an underperforming fund, with all the attendant risks and disruptions, would not likely provide any greater assurance of improved investment performance.

Brokerage and soft-dollar allocations; investor servicing

The Trustees considered various potential benefits that Putnam Management may receive in connection with the services it provides under the management contract with your fund. These include benefits related to brokerage allocation and the use of soft dollars, whereby a portion of the commissions paid by a fund for brokerage may be used to acquire research services that are expected to be useful to Putnam Management in managing the assets of the fund and of other clients. Subject to policies established by the Trustees, soft dollars generated by these means are used predominantly to acquire brokerage and research services (including third-party research and market data) that enhance Putnam Management’s investment capabilities and supplement Putnam Management’s internal research efforts. The Trustees indicated their continued intent to monitor regulatory and industry developments in this area with the assistance of their Brokerage Committee. In addition, with the assistance of their Brokerage Committee, the Trustees indicated their continued intent to monitor the allocation of the Putnam funds’ brokerage in order to ensure that the principle of seeking best price and execution remains paramount in the portfolio trading process.

Putnam Management may also receive benefits from payments that the funds make to Putnam Management’s affiliates for investor or distribution services. In conjunction with the annual review of your fund’s management and sub-management contracts, the Trustees reviewed your fund’s investor servicing agreement with PSERV and its distributor’s contract and distribution plans with Putnam Retail Management Limited Partnership (“PRM”), both of which are affiliates of Putnam Management. The Trustees concluded that the fees payable by the funds to PSERV and PRM, as applicable, for such services are fair and reasonable in relation to the nature and quality of such services, the fees paid by competitive funds and the costs incurred by PSERV and PRM, as applicable, in providing such services. Furthermore, the Trustees were of the view that the investor services provided by PSERV were required for the operation of the funds, and that they were of a quality at least equal to those provided by other providers.

 

Audited financial statements

These sections of the report, as well as the accompanying Notes, preceded by the Report of Independent Registered Public Accounting Firm, constitute the fund’s audited financial statements.

The fund’s portfolio lists all the fund’s investments and their values as of the last day of the reporting period. Holdings are organized by asset type and industry sector, country, or state to show areas of concentration and diversification.

Statement of assets and liabilities shows how the fund’s net assets and share price are determined. All investment and non-investment assets are added together. Any unpaid expenses and other liabilities are subtracted from this total. The result is divided by the number of shares to determine the net asset value per share, which is calculated separately for each class of shares. (For funds with preferred shares, the amount subtracted from total assets includes the liquidation preference of preferred shares.)

Statement of operations shows the fund’s net investment gain or loss. This is done by first adding up all the fund’s earnings — from dividends and interest income — and subtracting its operating expenses to determine net investment income (or loss). Then, any net gain or loss the fund realized on the sales of its holdings — as well as any unrealized gains or losses over the period — is added to or subtracted from the net investment result to determine the fund’s net gain or loss for the fiscal period.

Statement of changes in net assets shows how the fund’s net assets were affected by the fund’s net investment gain or loss, by distributions to shareholders, and by changes in the number of the fund’s shares. It lists distributions and their sources (net investment income or realized capital gains) over the current reporting period and the most recent fiscal year-end. The distributions listed here may not match the sources listed in the Statement of operations because the distributions are determined on a tax basis and may be paid in a different period from the one in which they were earned.

Financial highlights provide an overview of the fund’s investment results, per-share distributions, expense ratios, net investment income ratios, and portfolio turnover in one summary table, reflecting the five most recent reporting periods. In a semiannual report, the highlights table also includes the current reporting period.

 

Report of Independent Registered Public Accounting Firm

To the Board of Trustees and Shareholders of
Putnam Mortgage Securities Fund:

Opinion on the Financial Statements

We have audited the accompanying statement of assets and liabilities, including the fund’s portfolio, of Putnam Mortgage Securities Fund (the “Fund”) as of September 30, 2022, the related statement of operations for the year ended September, 2022, the statement of changes in net assets for each of the two years in the period ended September 30, 2022, including the related notes, and the financial highlights for each of the three years in the period ended September 30, 2022 (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Fund as of September 30, 2022, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period ended September 30, 2022 and the financial highlights for each of the three years in the period ended September 30, 2022 in conformity with accounting principles generally accepted in the United States of America.

The financial statements of the Fund as of and for the year ended September 30, 2019 and the financial highlights for each of the periods ended on or prior to September 30, 2019 (not presented herein, other than the financial highlights) were audited by other auditors whose report dated November 13, 2019, expressed an unqualified opinion on those financial statements and financial highlights.

Basis for Opinion

These financial statements are the responsibility of the Fund’s management. Our responsibility is to express an opinion on the Fund’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Fund in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits of these financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our procedures included confirmation of securities owned as of September 30, 2022, by correspondence with the custodian, transfer agent, and brokers; when replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.

PricewaterhouseCoopers LLP
Boston, Massachusetts
November 11, 2022

 

The fund’s portfolio 9/30/22

U.S. GOVERNMENT AND AGENCY MORTGAGE OBLIGATIONS (137.3%)*	Principal amount	Value
U.S. Government Guaranteed Mortgage Obligations (21.9%)
Government National Mortgage Association Adjustable Rate Mortgages (1 Yr Monthly Treasury Avg CMT Index + 1.50%), 1.625%, 7/20/26	$3,209	$3,137
Government National Mortgage Association Pass-Through Certificates
6.00%, 1/15/29	1	1
5.50%, with due dates from 8/15/35 to 5/20/49	100,359	102,059
5.00%, with due dates from 5/20/49 to 3/20/50	359,201	353,426
4.70%, with due dates from 5/20/67 to 8/20/67	328,492	323,433
4.659%, 9/20/65	111,084	109,785
4.639%, 6/20/67	348,250	344,637
4.524%, 3/20/67	391,424	386,100
4.50%, TBA, 10/1/52	12,000,000	11,471,322
4.50%, with due dates from 10/20/49 to 1/20/50	1,152,041	1,111,254
4.37%, 5/20/67	195,618	191,686
4.00%, TBA, 10/1/52	17,000,000	15,859,003
4.00%, with due dates from 2/20/45 to 1/20/50	340,201	320,271
3.50%, TBA, 10/1/52	29,000,000	26,346,451
3.50%, with due dates from 8/20/49 to 3/20/50	1,227,552	1,120,391
3.00%, TBA, 10/1/52	44,000,000	38,839,882
2.00%, TBA, 10/1/52	11,000,000	9,157,166
		106,040,004
U.S. Government Agency Mortgage Obligations (115.4%)
Uniform Mortgage-Backed Securities
6.00%, TBA, 10/1/52	4,400,000	4,465,680
5.50%, TBA, 10/1/52	57,000,000	56,637,218
5.00%, TBA, 10/1/52	117,000,000	113,837,315
4.50%, TBA, 10/1/52	41,000,000	39,007,646
4.00%, TBA, 10/1/52	50,000,000	46,343,740
3.50%, TBA, 10/1/52	37,000,000	33,271,085
3.00%, TBA, 10/1/52	60,000,000	52,162,500
2.50%, TBA, 10/1/52	133,000,000	111,605,700
2.00%, TBA, 10/1/52	125,000,000	101,144,537
		558,475,421
Total U.S. government and agency mortgage obligations (cost $692,584,541)		$664,515,425

MORTGAGE-BACKED SECURITIES (89.2%)*		Principal amount	Value
Agency collateralized mortgage obligations (38.2%)
Federal Home Loan Mortgage Corporation
REMICs IFB Ser. 3408, Class EK, ((-4.024 x ICE LIBOR USD 1 Month) + 25.79%), 14.455%, 4/15/37		$162,506	$253,509
REMICs IFB Ser. 2976, Class LC, ((-3.667 x ICE LIBOR USD 1 Month) + 24.42%), 14.088%, 5/15/35		594,953	803,186
REMICs IFB Ser. 3072, Class SM, ((-3.667 x ICE LIBOR USD 1 Month) + 23.80%), 13.465%, 11/15/35		325,142	494,215
REMICs IFB Ser. 3065, Class DC, ((-3 x ICE LIBOR USD 1 Month) + 19.86%), 11.407%, 3/15/35		1,469,327	1,866,045
REMICs IFB Ser. 2990, Class LB, ((-2.556 x ICE LIBOR USD 1 Month) + 16.95%), 9.744%, 6/15/34		218,254	235,715

MORTGAGE-BACKED SECURITIES (89.2%)* cont.		Principal amount	Value
Agency collateralized mortgage obligations cont.
Federal Home Loan Mortgage Corporation
REMICs Ser. 5043, IO, 5.00%, 11/25/50		$8,364,568	$1,844,321
REMICs Ser. 4980, Class KI, IO, 4.50%, 6/25/50		8,389,862	1,756,911
REMICs Ser. 4122, Class TI, IO, 4.50%, 10/15/42		1,715,006	332,104
REMICs Ser. 4024, Class PI, IO, 4.50%, 12/15/41		785,322	85,800
REMICs Ser. 4018, Class DI, IO, 4.50%, 7/15/41		698,178	52,282
REMICs Ser. 5119, Class IC, IO, 4.00%, 6/25/51		9,451,676	1,843,077
REMICs Ser. 5121, Class KI, IO, 4.00%, 6/25/51		8,133,802	1,739,281
REMICs Ser. 4953, Class AI, IO, 4.00%, 2/25/50		5,358,175	1,125,699
REMICs Ser. 4425, IO, 4.00%, 1/15/45		2,260,423	351,857
REMICs Ser. 4425, Class EI, IO, 4.00%, 1/15/45		3,107,804	517,884
REMICs Ser. 4452, Class QI, IO, 4.00%, 11/15/44		2,996,631	614,402
REMICs Ser. 4213, Class GI, IO, 4.00%, 11/15/41		1,344,412	47,328
REMICs Ser. 4019, Class JI, IO, 4.00%, 5/15/41		1,538,717	112,062
REMICs Ser. 4015, Class GI, IO, 4.00%, 3/15/27		864,271	47,156
Structured Pass-Through Certificates FRB Ser. 57, Class 2A1, 3.58%, 7/25/43 W		11,593	11,086
REMICs Ser. 5077, Class NI, IO, 3.50%, 2/25/51		13,532,505	2,342,050
REMICs Ser. 5065, Class DI, IO, 3.50%, 1/25/51		12,882,747	2,303,695
REMICs Ser. 5050, Class IM, IO, 3.50%, 10/25/50		12,150,075	2,214,450
REMICs Ser. 5080, Class IQ, IO, 3.50%, 4/25/50		25,157,639	4,970,463
REMICs Ser. 4165, Class AI, IO, 3.50%, 2/15/43		1,542,411	241,966
REMICs Ser. 4136, Class IQ, IO, 3.50%, 11/15/42		3,558,705	512,735
Strips Ser. 304, Class C37, IO, 3.50%, 12/15/27		452,611	18,982
Structured Pass-Through Certificates FRB Ser. 59, Class 2A1, 3.432%, 10/25/43 W		6,284	5,119
REMICs IFB Ser. 4436, Class SC, IO, ((-1 x ICE LIBOR USD 1 Month) + 6.15%), 3.332%, 2/15/45		3,430,977	433,405
REMICs IFB Ser. 4326, Class GS, IO, ((-1 x ICE LIBOR USD 1 Month) + 6.05%), 3.232%, 4/15/44		10,125,566	1,003,741
REMICs IFB Ser. 5003, Class DS, IO, ((-1 x ICE LIBOR USD 1 Month) + 6.10%), 3.016%, 8/25/50		8,303,021	1,011,413
REMICs Ser. 5071, Class IV, IO, 3.00%, 12/25/50		20,203,782	3,480,589
REMICs Ser. 4150, Class DI, IO, 3.00%, 1/15/43		3,868,606	512,590
REMICs Ser. 4141, Class PI, IO, 3.00%, 12/15/42		3,457,216	438,360
REMICs Ser. 4158, Class TI, IO, 3.00%, 12/15/42		4,877,042	362,901
REMICs Ser. 4165, Class TI, IO, 3.00%, 12/15/42		5,683,989	450,030
REMICs Ser. 4171, Class NI, IO, 3.00%, 6/15/42		3,132,120	332,634
REMICs Ser. 4183, Class MI, IO, 3.00%, 2/15/42		2,088,140	148,676
REMICs Ser. 4201, Class JI, IO, 3.00%, 12/15/41		1,878,986	90,081
REMICs IFB Ser. 4915, Class SD, IO, ((-1 x ICE LIBOR USD 1 Month) + 6.05%), 2.966%, 9/25/49		10,745,744	1,112,463
REMICs IFB Ser. 4949, Class WS, IO, ((-1 x ICE LIBOR USD 1 Month) + 6.00%), 2.916%, 2/25/50		4,922,052	488,917
REMICs IFB Ser. 4933, Class SA, IO, ((-1 x ICE LIBOR USD 1 Month) + 6.00%), 2.916%, 12/25/49		6,832,955	821,411
Structured Pass-Through Certificates FRB Ser. 8, Class A9, IO, 0.461%, 11/15/28 W		342,817	1,714
Structured Pass-Through Certificates FRB Ser. 59, Class 1AX, IO, 0.281%, 10/25/43 W		2,115,735	14,803

MORTGAGE-BACKED SECURITIES (89.2%)* cont.		Principal amount	Value
Agency collateralized mortgage obligations cont.
Federal Home Loan Mortgage Corporation
Structured Pass-Through Certificates Ser. 48, Class A2, IO, 0.212%, 7/25/33 W		$3,345,701	$25,083
REMICs Ser. 3369, Class BO, PO, zero %, 9/15/37		2,083	1,770
REMICs Ser. 3391, PO, zero %, 4/15/37		29,401	25,873
REMICs Ser. 3175, Class MO, PO, zero %, 6/15/36		15,514	13,807
REMICs Ser. 3210, PO, zero %, 5/15/36		1,391	1,321
REMICs FRB Ser. 3117, Class AF, (ICE LIBOR USD 1 Month + 0.00%), zero %, 2/15/36		13,744	12,095
Federal National Mortgage Association
REMICs IFB Ser. 06-62, Class PS, ((-6 x ICE LIBOR USD 1 Month) + 39.90%), 21.396%, 7/25/36		176,775	327,033
REMICs IFB Ser. 06-8, Class HP, ((-3.667 x ICE LIBOR USD 1 Month) + 24.57%), 13.259%, 3/25/36		227,126	230,044
REMICs IFB Ser. 07-53, Class SP, ((-3.667 x ICE LIBOR USD 1 Month) + 24.20%), 12.892%, 6/25/37		263,165	415,801
REMICs IFB Ser. 05-74, Class NK, ((-5 x ICE LIBOR USD 1 Month) + 27.50%), 12.08%, 5/25/35		456,389	479,496
REMICs IFB Ser. 08-24, Class SP, ((-3.667 x ICE LIBOR USD 1 Month) + 23.28%), 11.975%, 2/25/38		659,821	658,428
REMICs IFB Ser. 05-106, Class JC, ((-3.101 x ICE LIBOR USD 1 Month) + 20.12%), 10.561%, 12/25/35		438,298	591,703
REMICs IFB Ser. 11-4, Class CS, ((-2 x ICE LIBOR USD 1 Month) + 12.90%), 6.732%, 5/25/40		477,482	497,286
REMICs Ser. 15-58, Class KI, IO, 6.00%, 3/25/37		5,360,803	1,009,755
REMICs Ser. 15-86, Class MI, IO, 5.50%, 11/25/45		4,627,642	818,352
REMICs Ser. 10-109, Class IM, IO, 5.50%, 9/25/40		8,695,418	1,192,111
REMICs Ser. 18-51, Class BI, IO, 5.50%, 7/25/38		5,541,923	572,637
REMICs Ser. 17-19, Class IH, IO, 5.00%, 3/25/47		5,248,084	800,543
REMICs Ser. 12-151, Class IM, IO, 5.00%, 4/25/42		3,153,687	512,034
REMICs Ser. 20-31, IO, 4.50%, 5/25/50		11,816,704	2,476,729
REMICs Ser. 17-66, IO, 4.50%, 9/25/47		4,215,456	781,082
REMICs Ser. 17-32, Class IP, IO, 4.50%, 5/25/47		5,411,159	1,072,180
REMICs Trust FRB Ser. 04-W7, Class A2, 4.472%, 3/25/34 W		2,575	2,700
REMICs Ser. 20-60, Class NI, IO, 4.00%, 9/25/50		7,506,486	1,402,559
REMICs Ser. 15-83, IO, 4.00%, 10/25/43		1,245,038	189,929
REMICs Ser. 12-62, Class MI, IO, 4.00%, 3/25/41		708,590	32,737
REMICs Ser. 12-104, Class HI, IO, 4.00%, 9/25/27		2,000,624	104,282
REMICs FRB Ser. 03-W14, Class 2A, 3.874%, 1/25/43 W		7,905	7,507
REMICs FRB Ser. 03-W11, Class A1, 3.72%, 6/25/33 W		252	255
Trust FRB Ser. 03-W3, Class 1A4, 3.67%, 8/25/42 W		16,950	16,111
REMICs IFB Ser. 11-123, Class KS, IO, ((-1 x ICE LIBOR USD 1 Month) + 6.60%), 3.516%, 10/25/41		344,633	31,620
REMICs Ser. 21-25, Class IJ, IO, 3.50%, 5/25/51		24,643,560	4,285,761
REMICs Ser. 20-20, Class IK, IO, 3.50%, 3/25/50		11,099,502	1,296,044
REMICs Ser. 20-62, Class MI, IO, 3.50%, 5/25/49		33,611,466	5,901,357
REMICs Ser. 16-70, Class QI, IO, 3.50%, 10/25/46		4,208,780	623,910
REMICs Ser. 15-10, Class AI, IO, 3.50%, 8/25/43		1,050,795	33,861
REMICs Ser. 13-22, Class PI, IO, 3.50%, 10/25/42		2,243,277	314,680
REMICs Ser. 12-114, Class NI, IO, 3.50%, 10/25/41		2,629,530	174,942

MORTGAGE-BACKED SECURITIES (89.2%)* cont.		Principal amount	Value
Agency collateralized mortgage obligations cont.
Federal National Mortgage Association
REMICs IFB Ser. 18-47, Class SA, IO, ((-1 x ICE LIBOR USD 1 Month) + 6.25%), 3.166%, 7/25/48		$4,711,570	$452,169
REMICs IFB Ser. 18-36, Class SD, IO, ((-1 x ICE LIBOR USD 1 Month) + 6.25%), 3.166%, 6/25/48		13,364,855	1,044,279
REMICs IFB Ser. 18-20, Class SB, IO, ((-1 x ICE LIBOR USD 1 Month) + 6.25%), 3.166%, 3/25/48		5,413,649	525,124
Trust FRB Ser. 04-W2, Class 4A, 3.154%, 2/25/44 W		4,301	4,214
REMICs IFB Ser. 17-104, Class SL, IO, ((-1 x ICE LIBOR USD 1 Month) + 6.15%), 3.066%, 1/25/48		6,655,252	734,313
REMICs IFB Ser. 16-81, Class SA, IO, ((-1 x ICE LIBOR USD 1 Month) + 6.15%), 3.066%, 11/25/46		13,780,090	1,163,396
REMICs IFB Ser. 20-41, Class SE, IO, ((-1 x ICE LIBOR USD 1 Month) + 6.10%), 3.016%, 6/25/50		6,121,837	547,491
REMICs IFB Ser. 16-83, Class BS, IO, ((-1 x ICE LIBOR USD 1 Month) + 6.10%), 3.016%, 11/25/46		15,434,799	1,299,644
REMICs IFB Ser. 16-85, Class SL, IO, ((-1 x ICE LIBOR USD 1 Month) + 6.10%), 3.016%, 11/25/46		20,889,676	1,803,172
REMICs IFB Ser. 16-50, Class SM, IO, ((-1 x ICE LIBOR USD 1 Month) + 6.10%), 3.016%, 8/25/46		10,062,374	775,100
REMICs Ser. 20-96, IO, 3.00%, 1/25/51		9,363,248	1,416,191
REMICs Ser. 20-68, Class LI, IO, 3.00%, 10/25/50		9,604,471	1,543,554
REMICs Ser. 13-55, Class IK, IO, 3.00%, 4/25/43		2,101,971	266,576
REMICs Ser. 13-6, Class JI, IO, 3.00%, 2/25/43		4,876,214	621,717
REMICs Ser. 12-151, Class PI, IO, 3.00%, 1/25/43		2,620,464	334,450
REMICs Ser. 12-145, Class TI, IO, 3.00%, 11/25/42		919,273	35,367
REMICs Ser. 13-55, Class PI, IO, 3.00%, 5/25/42		1,651,575	73,753
REMICs Ser. 13-23, Class PI, IO, 3.00%, 10/25/41		283,667	915
REMICs Ser. 13-30, Class IP, IO, 3.00%, 10/25/41		465,620	2,527
REMICs Ser. 13-23, Class LI, IO, 3.00%, 6/25/41		559,969	5,139
REMICs Ser. 14-28, Class AI, IO, 3.00%, 3/25/40		1,090,581	22,205
REMICs IFB Ser. 19-51, Class SA, IO, ((-1 x ICE LIBOR USD 1 Month) + 6.05%), 2.966%, 9/25/49		8,842,526	895,159
REMICs IFB Ser. 19-45, Class SD, IO, ((-1 x ICE LIBOR USD 1 Month) + 6.05%), 2.966%, 8/25/49		5,249,243	512,459
REMICs IFB Ser. 16-8, Class SA, IO, ((-1 x ICE LIBOR USD 1 Month) + 6.05%), 2.966%, 3/25/46		9,082,130	1,007,510
REMICs IFB Ser. 19-71, Class CS, IO, ((-1 x ICE LIBOR USD 1 Month) + 6.00%), 2.916%, 11/25/49		2,836,599	428,891
REMICs IFB Ser. 19-83, Class QS, IO, ((-1 x ICE LIBOR USD 1 Month) + 5.95%), 2.866%, 1/25/50		16,329,014	2,104,413
REMICs FRB Ser. 07-95, Class A3, (ICE LIBOR USD 1 Month + 0.25%), 2.694%, 8/27/36		25,120,382	21,906,769
REMICs Ser. 21-3, Class NI, IO, 2.50%, 2/25/51		15,394,753	2,173,393
REMICs FRB Ser. 01-50, Class B1, IO, 0.397%, 10/25/41 W		1,815,065	9,075
REMICs Ser. 01-79, Class BI, IO, 0.256%, 3/25/45 W		893,860	5,542
REMICs Trust Ser. 98-W2, Class X, IO, 0.201%, 6/25/28 W		2,314,132	34,699
REMICs Trust Ser. 98-W5, Class X, IO, 0.05%, 7/25/28 W		757,652	11,360
REMICs Ser. 03-34, PO, zero %, 4/25/43		40,935	37,251
REMICs Ser. 08-53, Class DO, PO, zero %, 7/25/38		98,813	79,988

MORTGAGE-BACKED SECURITIES (89.2%)* cont.		Principal amount	Value
Agency collateralized mortgage obligations cont.
Federal National Mortgage Association
REMICs Ser. 07-14, Class KO, PO, zero %, 3/25/37		$3,601	$3,241
REMICs Ser. 06-125, Class OX, PO, zero %, 1/25/37		657	585
REMICs Ser. 06-84, Class OT, PO, zero %, 9/25/36		1,002	881
REMICs Ser. 06-46, Class OC, PO, zero %, 6/25/36		1,951	1,634
REMICs Ser. 08-36, Class OV, PO, zero %, 1/25/36		10,539	9,148
Government National Mortgage Association
Ser. 16-75, Class LI, IO, 6.00%, 1/20/40		3,587,391	632,508
Ser. 14-137, Class ID, IO, 5.50%, 9/16/44		3,267,221	570,587
Ser. 18-127, Class ID, IO, 5.00%, 7/20/45		63,094	9,445
Ser. 15-89, Class LI, IO, 5.00%, 12/20/44		4,127,131	820,267
Ser. 14-133, Class IP, IO, 5.00%, 9/16/44		2,810,091	531,501
Ser. 14-76, IO, 5.00%, 5/20/44		2,352,702	480,755
Ser. 13-51, Class QI, IO, 5.00%, 2/20/43		3,097,712	440,597
Ser. 13-3, Class IT, IO, 5.00%, 1/20/43		1,330,476	286,318
Ser. 13-6, Class OI, IO, 5.00%, 1/20/43		6,750,568	1,349,304
Ser. 10-35, Class UI, IO, 5.00%, 3/20/40		1,128,826	233,726
Ser. 10-9, Class UI, IO, 5.00%, 1/20/40		5,526,896	1,179,661
Ser. 09-121, Class UI, IO, 5.00%, 12/20/39		3,296,385	692,241
Ser. 18-1, IO, 4.50%, 1/20/48		4,601,749	885,022
Ser. 13-34, Class HI, IO, 4.50%, 3/20/43		3,948,622	739,149
Ser. 13-39, Class IJ, IO, 4.50%, 3/20/43		5,147,403	990,847
Ser. 12-129, IO, 4.50%, 11/16/42		2,773,388	521,952
Ser. 10-35, Class AI, IO, 4.50%, 3/20/40		3,564,545	634,605
Ser. 10-35, Class DI, IO, 4.50%, 3/20/40		5,558,050	1,049,082
Ser. 10-35, Class QI, IO, 4.50%, 3/20/40		1,403,339	270,164
Ser. 10-9, Class QI, IO, 4.50%, 1/20/40		823,147	156,398
Ser. 09-121, Class CI, IO, 4.50%, 12/16/39		3,839,229	730,849
Ser. 15-94, IO, 4.00%, 7/20/45		9,717,919	1,843,489
Ser. 15-53, Class MI, IO, 4.00%, 4/16/45		3,669,026	698,216
Ser. 14-2, Class IL, IO, 4.00%, 1/16/44		692,924	116,501
Ser. 14-100, Class NI, IO, 4.00%, 6/20/43		2,776,293	196,885
Ser. 13-67, Class IP, IO, 4.00%, 4/16/43		4,945,702	772,964
Ser. 13-165, Class IL, IO, 4.00%, 3/20/43		1,206,601	192,696
Ser. 12-56, Class IB, IO, 4.00%, 4/20/42		3,274,248	572,980
Ser. 12-38, Class MI, IO, 4.00%, 3/20/42		6,318,732	1,087,770
Ser. 14-104, IO, 4.00%, 3/20/42		4,214,924	517,534
Ser. 14-182, Class BI, IO, 4.00%, 1/20/39		5,917,167	644,751
IFB Ser. 13-182, Class SP, IO, ((-1 x ICE LIBOR USD 1 Month) + 6.70%), 3.686%, 12/20/43		3,142,611	323,092
Ser. 16-H24, Class KI, IO, 3.609%, 11/20/66 W		7,035,588	338,027
IFB Ser. 11-156, Class SK, IO, ((-1 x ICE LIBOR USD 1 Month) + 6.60%), 3.586%, 4/20/38		4,590,960	538,065
Ser. 20-175, Class JI, IO, 3.50%, 11/20/50		12,668,115	2,232,848
Ser. 13-79, Class PI, IO, 3.50%, 4/20/43		2,537,545	290,930
Ser. 15-168, Class IG, IO, 3.50%, 3/20/43		2,097,835	279,845
Ser. 13-37, Class JI, IO, 3.50%, 1/20/43		1,092,923	123,937
Ser. 13-27, Class PI, IO, 3.50%, 12/20/42		621,796	73,838
Ser. 12-136, IO, 3.50%, 11/20/42		6,027,206	866,415

MORTGAGE-BACKED SECURITIES (89.2%)* cont.		Principal amount	Value
Agency collateralized mortgage obligations cont.
Government National Mortgage Association
Ser. 18-127, Class IA, IO, 3.50%, 4/20/42		$4,285,102	$306,985
Ser. 14-102, Class IG, IO, 3.50%, 3/16/41		921,895	49,483
Ser. 15-52, Class KI, IO, 3.50%, 11/20/40		1,773,191	131,393
Ser. 15-24, Class AI, IO, 3.50%, 12/20/37		941,914	12,663
Ser. 15-24, Class IC, IO, 3.50%, 11/20/37		419,216	7,588
IFB Ser. 21-77, Class SM, IO, ((-1 x ICE LIBOR USD 1 Month) + 6.30%), 3.286%, 5/20/51		11,928,995	1,389,306
IFB Ser. 20-133, Class CS, IO, ((-1 x ICE LIBOR USD 1 Month) + 6.30%), 3.286%, 9/20/50		9,470,476	1,188,933
IFB Ser. 20-112, Class MS, IO, ((-1 x ICE LIBOR USD 1 Month) + 6.30%), 3.286%, 8/20/50		5,826,813	748,396
IFB Ser. 19-35, Class SE, IO, ((-1 x ICE LIBOR USD 1 Month) + 6.15%), 3.211%, 1/16/44		5,961,501	421,067
IFB Ser. 19-158, Class AS, IO, ((-1 x ICE LIBOR USD 1 Month) + 6.15%), 3.211%, 9/16/43		6,310,613	640,731
IFB Ser. 18-89, Class LS, IO, ((-1 x ICE LIBOR USD 1 Month) + 6.20%), 3.186%, 6/20/48		4,241,342	377,853
IFB Ser. 17-156, Class SL, IO, ((-1 x ICE LIBOR USD 1 Month) + 6.20%), 3.186%, 10/20/47		4,987,709	476,949
IFB Ser. 13-87, Class SA, IO, ((-1 x ICE LIBOR USD 1 Month) + 6.20%), 3.186%, 6/20/43		7,773,947	777,600
IFB Ser. 19-56, Class SK, IO, ((-1 x ICE LIBOR USD 1 Month) + 6.15%), 3.136%, 5/20/49		5,227,947	479,506
IFB Ser. 10-20, Class SC, IO, ((-1 x ICE LIBOR USD 1 Month) + 6.15%), 3.136%, 2/20/40		497,479	49,186
IFB Ser. 19-100, Class JS, IO, ((-1 x ICE LIBOR USD 1 Month) + 6.10%), 3.086%, 8/20/49		4,254,866	337,402
IFB Ser. 16-80, Class SD, IO, ((-1 x ICE LIBOR USD 1 Month) + 6.10%), 3.086%, 6/20/46		7,389,107	820,837
IFB Ser. 20-15, Class CS, IO, ((-1 x ICE LIBOR USD 1 Month) + 6.05%), 3.036%, 2/20/50		957,413	71,359
IFB Ser. 19-125, Class SG, IO, ((-1 x ICE LIBOR USD 1 Month) + 6.05%), 3.036%, 10/20/49		8,612,640	1,242,563
IFB Ser. 19-110, Class SQ, IO, ((-1 x ICE LIBOR USD 1 Month) + 6.05%), 3.036%, 9/20/49		6,747,689	695,243
IFB Ser. 19-99, Class KS, IO, ((-1 x ICE LIBOR USD 1 Month) + 6.05%), 3.036%, 8/20/49		442,520	40,672
IFB Ser. 19-78, Class SJ, IO, ((-1 x ICE LIBOR USD 1 Month) + 6.05%), 3.036%, 6/20/49		275,947	21,845
Ser. 21-188, Class IU, IO, 3.00%, 10/20/51		5,434,381	1,132,257
Ser. 21-188, Class IW, IO, 3.00%, 10/20/51		8,991,784	1,499,483
Ser. 21-76, Class NI, IO, 3.00%, 8/20/50		12,746,307	1,848,215
Ser. 14-174, Class AI, IO, 3.00%, 11/16/29		2,123,821	125,730
IFB Ser. 19-121, Class SD, IO, ((-1 x ICE LIBOR USD 1 Month) + 6.00%), 2.986%, 10/20/49		8,589,753	1,164,899
IFB Ser. 20-47, Class SA, IO, ((-1 x ICE LIBOR USD 1 Month) + 6.00%), 2.986%, 5/20/44		12,456,502	1,152,226
Ser. 17-H20, Class AI, IO, 2.779%, 10/20/67 W		20,691,691	1,448,418
Ser. 16-H13, Class IK, IO, 2.647%, 6/20/66 W		12,520,216	1,049,585
IFB Ser. 14-119, Class SA, IO, ((-1 x ICE LIBOR USD 1 Month) + 5.60%), 2.586%, 8/20/44		3,533,211	293,219

MORTGAGE-BACKED SECURITIES (89.2%)* cont.		Principal amount	Value
Agency collateralized mortgage obligations cont.
Government National Mortgage Association
Ser. 21-8, Class IP, IO, 2.50%, 1/20/51		$30,614,655	$4,218,133
Ser. 20-162, Class UI, IO, 2.50%, 10/20/50		8,960,255	1,166,490
Ser. 20-138, Class IB, IO, 2.50%, 9/20/50		20,005,433	2,568,153
Ser. 16-H04, Class HI, IO, 2.377%, 7/20/65 W		10,547,072	358,600
Ser. 17-H04, Class BI, IO, 2.353%, 2/20/67 W		11,087,153	510,726
Ser. 16-H27, Class GI, IO, 2.33%, 12/20/66 W		17,261,703	879,294
Ser. 16-H07, Class PI, IO, 2.272%, 3/20/66 W		21,362,384	1,517,824
Ser. 17-H25, Class CI, IO, 2.228%, 12/20/67 W		14,001,902	843,282
Ser. 18-H01, Class XI, IO, 2.185%, 1/20/68 W		12,537,382	892,732
Ser. 16-H24, IO, 2.142%, 9/20/66 W		13,228,247	979,101
Ser. 17-H25, IO, 2.134%, 11/20/67 W		9,495,512	581,600
Ser. 15-H14, Class AI, IO, 2.129%, 6/20/65 W		23,651,426	911,127
Ser. 18-H04, Class JI, IO, 2.127%, 3/20/68 W		13,411,085	560,583
Ser. 15-H20, Class CI, IO, 2.123%, 8/20/65 W		20,347,811	1,096,747
FRB Ser. 15-H16, Class XI, IO, 2.115%, 7/20/65 W		8,774,712	392,230
Ser. 17-H06, Class MI, IO, 2.10%, 2/20/67 W		17,313,284	696,790
Ser. 15-H24, Class HI, IO, 2.092%, 9/20/65 W		5,021,485	95,263
Ser. 18-H02, Class IM, IO, 2.076%, 2/20/68 W		9,175,654	601,648
FRB Ser. 16-H19, Class AI, IO, 2.076%, 9/20/66 W		24,932,262	999,335
Ser. 16-H06, Class HI, IO, 2.065%, 2/20/66 W		11,120,421	501,108
Ser. 17-H08, Class NI, IO, 2.02%, 3/20/67 W		10,510,123	364,701
Ser. 17-H08, Class EI, IO, 2.015%, 2/20/67 W		12,707,701	610,021
Ser. 17-H08, Class GI, IO, 1.919%, 2/20/67 W		9,000,305	719,285
Ser. 17-H14, Class JI, IO, 1.88%, 6/20/67 W		5,579,403	454,012
Ser. 17-H09, IO, 1.766%, 4/20/67 W		10,320,550	330,825
Ser. 15-H23, Class TI, IO, 1.76%, 9/20/65 W		14,081,501	719,565
Ser. 17-H14, Class LI, IO, 1.735%, 6/20/67 W		6,890,711	384,282
Ser. 17-H23, Class BI, IO, 1.714%, 11/20/67 W		8,531,214	459,832
Ser. 15-H23, Class DI, IO, 1.707%, 9/20/65 W		4,333,243	241,795
Ser. 17-H10, Class MI, IO, 1.695%, 4/20/67 W		11,854,126	365,107
Ser. 15-H13, Class AI, IO, 1.672%, 6/20/65 W		14,547,611	544,358
Ser. 16-H06, Class DI, IO, 1.531%, 7/20/65 W		15,097,675	305,124
Ser. 14-H25, Class BI, IO, 1.511%, 12/20/64 W		13,278,973	443,252
Ser. 16-H23, Class NI, IO, 1.178%, 10/20/66 W		23,781,259	796,672
FRB Ser. 11-H07, Class FI, IO, 1.077%, 2/20/61 W		13,329,416	323,905
Ser. 16-H18, Class QI, IO, 1.023%, 6/20/66 W		14,033,790	626,342
Ser. 15-H22, Class AI, IO, 1.017%, 9/20/65 W		20,644,948	829,927
Ser. 16-H24, Class JI, IO, 0.962%, 11/20/66 W		3,878,972	184,988
Ser. 15-H10, Class HI, IO, 0.641%, 4/20/65 W		16,214,964	492,935
Ser. 17-H03, Class KI, IO, 0.614%, 1/20/67 W		16,504,571	1,280,755
Ser. 15-H25, Class BI, IO, 0.592%, 10/20/65 W		10,656,816	412,419
Ser. 16-H17, Class DI, IO, 0.489%, 7/20/66 W		15,145,416	467,448
Ser. 16-H10, Class AI, IO, 0.268%, 4/20/66 W		19,762,564	423,097
Ser. 14-H21, Class AI, IO, 0.203%, 10/20/64 W		15,756,077	542,687
Ser. 16-H03, Class AI, IO, 0.125%, 1/20/66 W		11,320,356	340,453
Ser. 16-H04, Class KI, IO, 0.043%, 2/20/66 W		12,963,405	257,279

MORTGAGE-BACKED SECURITIES (89.2%)* cont.		Principal amount	Value
Agency collateralized mortgage obligations cont.
Government National Mortgage Association
Ser. 15-H04, Class AI, IO, zero %, 12/20/64 W		$14,210,370	$377,108
GSMPS Mortgage Loan Trust 144A FRB Ser. 99-2, IO, 0.431%, 9/19/27 W		318,394	796
			184,860,909
Commercial mortgage-backed securities (32.7%)
BANK 144A Ser. 18-BN11, Class D, 3.00%, 3/15/61		2,981,000	2,108,747
Barclays Commercial Mortgage Trust 144A Ser. 19-C4, Class E, 3.25%, 8/15/52		1,810,000	1,253,143
Bear Stearns Commercial Mortgage Securities Trust FRB Ser. 07-T26, Class AJ, 5.566%, 1/12/45 W		13,847	13,708
Benchmark Mortgage Trust 144A
FRB Ser. 18-B3, Class D, 3.187%, 4/10/51 W		3,362,000	2,462,264
Ser. 19-B11, Class D, 3.00%, 5/15/52		2,608,000	1,803,664
Ser. 18-B1, Class E, 3.00%, 1/15/51 W		1,840,000	894,700
Ser. 19-B13, Class D, 2.50%, 8/15/57		1,788,000	1,319,580
BWAY Mortgage Trust 144A FRB Ser. 22-26BW, Class F, 5.029%, 2/10/44 W		2,305,000	1,591,607
CD Commercial Mortgage Trust 144A
Ser. 17-CD3, Class D, 3.25%, 2/10/50		2,112,000	1,496,472
Ser. 19-CD8, Class D, 3.00%, 8/15/57		1,450,000	991,075
Citigroup Commercial Mortgage Trust
FRB Ser. 13-GC15, Class C, 5.335%, 9/10/46 W		1,567,000	1,538,175
FRB Ser. 15-GC27, Class C, 4.565%, 2/10/48 W		1,731,000	1,602,548
Citigroup Commercial Mortgage Trust 144A
FRB Ser. 12-GC8, Class C, 4.944%, 9/10/45 W		1,523,000	1,523,000
Ser. 15-P1, Class D, 3.225%, 9/15/48		3,226,000	2,676,341
Ser. 15-GC27, Class E, 3.00%, 2/10/48		1,743,000	1,366,613
COMM Mortgage Trust
FRB Ser. 14-CR16, Class C, 5.081%, 4/10/47 W		2,441,904	2,314,085
FRB Ser. 13-CR13, Class C, 5.04%, 11/10/46 W		1,355,000	1,295,025
FRB Ser. 14-UBS3, Class C, 4.896%, 6/10/47 W		956,000	906,579
FRB Ser. 14-UBS4, Class C, 4.806%, 8/10/47 W		1,158,060	1,080,216
FRB Ser. 15-CR26, Class D, 3.619%, 10/10/48 W		1,696,375	1,411,351
COMM Mortgage Trust 144A
FRB Ser. 13-LC13, Class D, 5.425%, 8/10/46 W		2,546,000	2,361,496
FRB Ser. 13-CR13, Class D, 5.04%, 11/10/46 W		1,906,000	1,717,272
FRB Ser. 14-CR17, Class D, 5.007%, 5/10/47 W		3,623,000	3,215,462
FRB Ser. 14-CR19, Class D, 4.854%, 8/10/47 W		2,082,000	1,891,696
FRB Ser. 15-LC19, Class E, 4.356%, 2/10/48 W		1,786,000	1,495,848
Ser. 12-CR4, Class B, 3.703%, 10/15/45		2,419,000	1,983,580
Ser. 13-LC6, Class E, 3.50%, 1/10/46		1,077,000	1,006,875
Ser. 17-COR2, Class D, 3.00%, 9/10/50		2,254,000	1,702,040
FRB Ser. 18-COR3, Class D, 2.962%, 5/10/51 W		869,000	600,181
CSAIL Commercial Mortgage Trust
FRB Ser. 15-C2, Class C, 4.317%, 6/15/57 W		1,010,000	856,566
FRB Ser. 15-C2, Class D, 4.317%, 6/15/57 W		3,030,000	2,103,347
CSAIL Commercial Mortgage Trust 144A
FRB Ser. 18-C14, Class D, 5.08%, 11/15/51 W		1,300,000	1,023,950
Ser. 19-C17, Class D, 2.50%, 9/15/52		1,626,000	1,036,688

MORTGAGE-BACKED SECURITIES (89.2%)* cont.		Principal amount	Value
Commercial mortgage-backed securities cont.
DBUBS Mortgage Trust 144A FRB Ser. 11-LC3A, Class D, 5.541%, 8/10/44 W		$3,221,621	$2,944,561
Federal Home Loan Mortgage Corporation 144A Multifamily Structured Credit Risk FRB Ser. 21-MN3, Class M2, 6.281%, 11/25/51		2,289,000	2,030,362
FREMF Mortgage Trust 144A FRB Ser. 19-KF65, Class B, (ICE LIBOR USD 1 Month + 2.40%), 4.953%, 7/25/29		936,103	876,101
FS Rialto Issuer, LLC 144A FRB Ser. 22-FL5, Class D, (CME Term SOFR 1 Month + 4.82%), 7.836%, 6/19/37		1,333,000	1,304,607
GS Mortgage Securities Corp., II 144A FRB Ser. 13-GC10, Class D, 4.541%, 2/10/46 W		2,209,000	2,148,350
GS Mortgage Securities Trust
FRB Ser. 14-GC18, Class C, 5.225%, 1/10/47 W		4,153,000	2,865,570
FRB Ser. 14-GC22, Class C, 4.843%, 6/10/47 W		1,431,000	1,360,154
GS Mortgage Securities Trust 144A
FRB Ser. 10-C1, Class D, 6.566%, 8/10/43 W		1,263,000	939,075
FRB Ser. 14-GC24, Class D, 4.665%, 9/10/47 W		4,747,000	3,337,634
Ser. 16-GS2, Class D, 2.753%, 5/10/49		1,149,000	898,933
JPMBB Commercial Mortgage Securities Trust FRB Ser. 14-C22, Class C, 4.699%, 9/15/47 W		2,294,000	2,090,105
JPMBB Commercial Mortgage Securities Trust 144A
FRB Ser. C14, Class D, 4.699%, 8/15/46 W		4,088,000	2,418,747
FRB Ser. 13-C12, Class E, 4.231%, 7/15/45 W		1,235,000	1,070,499
JPMCC Commercial Mortgage Securities Trust 144A FRB Ser. 17-JP7, Class D, 4.531%, 9/15/50 W		1,453,000	1,186,629
JPMDB Commercial Mortgage Securities Trust Ser. 17-C5, Class C, 4.512%, 3/15/50 W		1,858,000	1,469,666
JPMDB Commercial Mortgage Securities Trust 144A FRB Ser. 16-C2, Class D, 3.488%, 6/15/49 W		2,330,000	1,472,101
JPMorgan Chase Commercial Mortgage Securities Trust
Ser. 06-LDP9, Class AMS, 5.337%, 5/15/47		1,978,954	1,786,706
FRB Ser. 13-C10, Class C, 4.357%, 12/15/47 W		1,929,000	1,892,920
FRB Ser. 13-LC11, Class D, 4.303%, 4/15/46 W		2,891,000	2,258,917
Ser. 13-LC11, Class B, 3.499%, 4/15/46		725,000	708,352
JPMorgan Chase Commercial Mortgage Securities Trust 144A
FRB Ser. 11-C3, Class D, 5.709%, 2/15/46 W		2,164,000	1,610,250
FRB Ser. 11-C3, Class E, 5.709%, 2/15/46 W		1,629,000	753,931
FRB Ser. 13-C16, Class D, 5.17%, 12/15/46 W		1,295,000	1,238,114
Morgan Stanley Bank of America Merrill Lynch Trust
FRB Ser. 15-C25, Class C, 4.677%, 10/15/48 W		1,824,000	1,673,849
FRB Ser. 14-C16, Class B, 4.475%, 6/15/47 W		1,695,000	1,631,895
FRB Ser. 13-C9, Class C, 4.153%, 5/15/46 W		946,000	901,338
Morgan Stanley Bank of America Merrill Lynch Trust 144A
FRB Ser. 13-C12, Class D, 4.914%, 10/15/46 W		479,000	439,293
FRB Ser. 13-C12, Class E, 4.914%, 10/15/46 W		2,040,618	1,505,487
FRB Ser. 12-C6, Class G, 4.50%, 11/15/45 W		1,288,000	795,134
FRB Ser. 15-C24, Class E, 4.476%, 5/15/48 W		1,780,000	1,446,250
FRB Ser. 15-C23, Class D, 4.281%, 7/15/50 W		3,439,000	2,965,258
FRB Ser. 13-C9, Class D, 4.241%, 5/15/46 W		1,234,000	1,089,770
FRB Ser. 13-C10, Class F, 4.206%, 7/15/46 W		2,316,000	515,808
Ser. 14-C19, Class D, 3.25%, 12/15/47		2,815,000	2,429,973

MORTGAGE-BACKED SECURITIES (89.2%)* cont.		Principal amount	Value
Commercial mortgage-backed securities cont.
Morgan Stanley Capital I Trust 144A
FRB Ser. 12-C4, Class E, 5.336%, 3/15/45 W		$2,436,000	$1,717,721
FRB Ser. 11-C3, Class E, 5.253%, 7/15/49 W		8,047,130	7,141,815
Multifamily Connecticut Avenue Securities Trust 144A FRB Ser. 19-01, Class M10, 6.334%, 10/25/49		6,092,305	5,776,737
PFP, Ltd. 144A FRB Ser. 21-8, Class A, 3.939%, 8/9/37 (Cayman Islands)		1,550,267	1,473,127
Ready Capital Mortgage Financing, LLC 144A FRB Ser. 22-FL9, Class A, 5.531%, 6/25/37		1,350,460	1,332,010
UBS Commercial Mortgage Trust FRB Ser. 17-C3, Class C, 4.539%, 8/15/50 W		3,138,000	2,561,722
UBS Commercial Mortgage Trust 144A
FRB Ser. 12-C1, Class D, 6.66%, 5/10/45 W		646,014	589,358
FRB Ser. 12-C1, Class E, 5.00%, 5/10/45 W		2,266,000	883,740
UBS-Barclays Commercial Mortgage Trust 144A FRB Ser. 12-C4, Class D, 4.651%, 12/10/45 W		1,801,000	1,750,956
UBS-Citigroup Commercial Mortgage Trust 144A FRB Ser. 11-C1, Class D, 6.663%, 1/10/45 W		3,176,000	2,810,735
Wells Fargo Commercial Mortgage Trust
FRB Ser. 18-C46, Class C, 5.155%, 8/15/51 W		823,000	726,093
FRB Ser. 16-NXS5, Class D, 5.148%, 1/15/59 W		2,473,000	2,127,537
FRB Ser. 15-C31, Class C, 4.75%, 11/15/48 W		1,373,000	1,240,469
FRB Ser. 15-SG1, Class B, 4.602%, 9/15/48 W		2,010,000	1,785,240
FRB Ser. 15-C29, Class D, 4.359%, 6/15/48 W		1,138,000	980,467
Ser. 19-C50, Class C, 4.345%, 5/15/52		935,000	774,471
FRB Ser. 20-C57, Class C, 4.157%, 8/15/53 W		788,000	640,102
Ser. 15-C31, Class D, 3.852%, 11/15/48		1,248,000	1,025,975
Wells Fargo Commercial Mortgage Trust 144A
FRB Ser. 15-C31, Class E, 4.75%, 11/15/48 W		1,550,000	1,105,563
FRB Ser. 15-C30, Class D, 4.648%, 9/15/58 W		1,050,500	910,442
Ser. 17-RB1, Class D, 3.401%, 3/15/50		1,983,000	1,504,522
Ser. 16-C33, Class D, 3.123%, 3/15/59		2,673,000	2,188,888
Ser. 20-C55, Class D, 2.50%, 2/15/53		1,091,000	726,556
Ser. 19-C54, Class D, 2.50%, 12/15/52		967,000	742,993
WF-RBS Commercial Mortgage Trust Ser. 14-C21, Class C, 4.234%, 8/15/47 W		2,558,000	2,314,113
WF-RBS Commercial Mortgage Trust 144A
Ser. 11-C4, Class E, 4.987%, 6/15/44 W		1,659,568	1,246,350
FRB Ser. 12-C9, Class D, 4.978%, 11/15/45 W		5,183,466	5,146,578
FRB Ser. 12-C9, Class E, 4.978%, 11/15/45 W		1,461,000	1,449,426
FRB Ser. 12-C7, Class D, 4.814%, 6/15/45 W		1,847,000	667,921
			158,041,860
Residential mortgage-backed securities (non-agency) (18.3%)
American Home Mortgage Investment Trust FRB Ser. 07-1, Class GA1C, (ICE LIBOR USD 1 Month + 0.19%), 3.274%, 5/25/47		5,426,441	3,210,462
Arroyo Mortgage Trust 144A Ser. 19-3, Class M1, 4.204%, 10/25/48 W		750,000	626,797
Bayview Financial Mortgage Pass-Through Trust Ser. 06-C, Class 1A3, 6.528%, 11/28/36		4,962,634	4,678,749

MORTGAGE-BACKED SECURITIES (89.2%)* cont.		Principal amount	Value
Residential mortgage-backed securities (non-agency) cont.
Bear Stearns Alt-A Trust
FRB Ser. 05-10, Class 11A1, (ICE LIBOR USD 1 Month + 0.50%), 3.584%, 1/25/36		$256,224	$333,287
FRB Ser. 05-8, Class 21A1, 3.339%, 10/25/35 W		417,520	351,963
Bellemeade Re, Ltd. 144A FRB Ser. 17-1, Class M2, (ICE LIBOR USD 1 Month + 3.35%), 6.434%, 10/25/27 (Bermuda)		799,788	799,100
Carrington Mortgage Loan Trust FRB Ser. 06-NC2, Class A4, (ICE LIBOR USD 1 Month + 0.24%), 3.564%, 6/25/36		3,594,747	3,459,535
Countrywide Alternative Loan Trust FRB Ser. 06-OA19, Class A1, (ICE LIBOR USD 1 Month + 0.18%), 3.173%, 2/20/47		2,042,089	1,568,593
Countrywide Asset-Backed Certificates FRB Ser. 07-10, Class 1A1, (ICE LIBOR USD 1 Month + 0.18%), 3.264%, 6/25/47		4,250,848	3,965,346
Eagle Re, Ltd. 144A FRB Ser. 20-1, Class B1, (ICE LIBOR USD 1 Month + 2.85%), 5.934%, 1/25/30		765,000	691,378
Federal Home Loan Mortgage Corporation
Structured Agency Credit Risk Debt FRN Ser. 15-DNA3, Class B, (ICE LIBOR USD 1 Month + 9.35%), 12.434%, 4/25/28		329,850	340,364
Structured Agency Credit Risk Debt FRN Ser. 15-HQA1, Class B, (ICE LIBOR USD 1 Month + 8.80%), 11.884%, 3/25/28		2,714,068	2,732,185
Structured Agency Credit Risk Debt FRN Ser. 16-DNA3, Class M3, (ICE LIBOR USD 1 Month + 5.00%), 8.084%, 12/25/28		2,924,117	3,066,215
Structured Agency Credit Risk Debt FRN Ser. 17-HQA2, Class B1, (ICE LIBOR USD 1 Month + 4.75%), 7.834%, 12/25/29		250,000	256,556
Federal Home Loan Mortgage Corporation 144A
Structured Agency Credit Risk Trust FRB Ser. 19-HQA2, Class B2, (ICE LIBOR USD 1 Month + 11.25%), 14.334%, 4/25/49		637,000	693,700
Structured Agency Credit Risk Trust FRB Ser. 18-HQA2, Class B2, (ICE LIBOR USD 1 Month + 11.00%), 14.084%, 10/25/48		2,108,000	2,321,708
Structured Agency Credit Risk Trust FRB Ser. 19-DNA1, Class B2, (ICE LIBOR USD 1 Month + 10.75%), 13.834%, 1/25/49		4,520,000	4,817,326
Structured Agency Credit Risk Trust FRB Ser. 19-DNA2, Class B2, (ICE LIBOR USD 1 Month + 10.50%), 13.584%, 3/25/49		282,000	295,856
Structured Agency Credit Risk Trust REMICs FRB Ser. 20-DNA4, Class B2, (ICE LIBOR USD 1 Month + 10.00%), 13.084%, 8/25/50		2,647,000	2,974,079
Structured Agency Credit Risk Trust REMICs FRB Ser. 20-HQA3, Class B2, (ICE LIBOR USD 1 Month + 10.00%), 13.084%, 7/25/50		916,000	1,019,355
Structured Agency Credit Risk Trust FRB Ser. 19-DNA4, Class B2, (ICE LIBOR USD 1 Month + 6.25%), 9.334%, 10/25/49		1,070,000	959,690
Structured Agency Credit Risk Trust REMICs FRB Ser. 20-HQA3, Class B1, (ICE LIBOR USD 1 Month + 5.75%), 8.834%, 7/25/50		1,351,000	1,366,417
Structured Agency Credit Risk Trust FRB Ser. 18-HQA2, Class B1, (ICE LIBOR USD 1 Month + 4.25%), 7.334%, 10/25/48		1,347,000	1,389,515
Structured Agency Credit Risk Trust FRB Ser. 19-FTR3, Class FTR3, (ICE LIBOR USD 1 Month + 4.80%), 7.244%, 9/25/47		371,000	293,775
Structured Agency Credit Risk Trust FRB Ser. 18-DNA2, Class B1, (ICE LIBOR USD 1 Month + 3.70%), 6.784%, 12/25/30		2,018,000	1,977,938
Seasoned Credit Risk Transfer Trust Ser. 19-2, Class M, 4.75%, 8/25/58 W		1,129,000	971,880
Seasoned Credit Risk Transfer Trust FRB Ser. 18-3, Class 3, 4.75%, 8/25/57 W		876,000	770,055
Seasoned Credit Risk Transfer Trust Ser. 19-4, Class M, 4.50%, 2/25/59 W		485,000	418,077

MORTGAGE-BACKED SECURITIES (89.2%)* cont.		Principal amount	Value
Residential mortgage-backed securities (non-agency) cont.
Federal National Mortgage Association
Connecticut Avenue Securities FRB Ser. 16-C03, Class 2B, (ICE LIBOR USD 1 Month + 12.75%), 15.834%, 10/25/28		$467,239	$510,750
Connecticut Avenue Securities FRB Ser. 16-C03, Class 1B, (ICE LIBOR USD 1 Month + 11.75%), 14.834%, 10/25/28		2,822,864	3,058,311
Connecticut Avenue Securities FRB Ser. 16-C04, Class 1B, (ICE LIBOR USD 1 Month + 10.25%), 13.334%, 1/25/29		781,336	806,508
Connecticut Avenue Securities FRB Ser. 16-C06, Class 1B, (ICE LIBOR USD 1 Month + 9.25%), 12.334%, 4/25/29		505,630	522,870
Connecticut Avenue Securities FRB Ser. 15-C04, Class 1M2, (ICE LIBOR USD 1 Month + 5.70%), 8.784%, 4/25/28		337,629	349,573
Connecticut Avenue Securities FRB Ser. 17-C02, Class 2B1, (ICE LIBOR USD 1 Month + 5.50%), 8.584%, 9/25/29		1,518,000	1,605,934
Connecticut Avenue Securities FRB Ser. 16-C03, Class 1M2, (ICE LIBOR USD 1 Month + 5.30%), 8.384%, 10/25/28		487,231	503,963
Connecticut Avenue Securities FRB Ser. 17-C07, Class 2B1, (ICE LIBOR USD 1 Month + 4.45%), 7.534%, 5/25/30		2,739,000	2,808,045
Connecticut Avenue Securities FRB Ser. 17-C06, Class 2B1, (ICE LIBOR USD 1 Month + 4.45%), 7.534%, 2/25/30		3,203,000	3,308,100
Connecticut Avenue Securities FRB Ser. 17-C06, Class 1B1, (ICE LIBOR USD 1 Month + 4.15%), 7.234%, 2/25/30		3,742,000	3,828,493
Connecticut Avenue Securities FRB Ser. 18-C06, Class 2B1, (ICE LIBOR USD 1 Month + 4.10%), 7.184%, 3/25/31		1,273,000	1,260,610
Connecticut Avenue Securities FRB Ser. 17-C07, Class 1B1, (ICE LIBOR USD 1 Month + 4.00%), 7.084%, 5/25/30		3,800,000	3,900,485
Connecticut Avenue Securities FRB Ser. 18-C06, Class 1B1, (ICE LIBOR USD 1 Month + 3.75%), 6.834%, 3/25/31		1,687,000	1,665,913
Connecticut Avenue Securities FRB Ser. 18-C03, Class 1B1, (ICE LIBOR USD 1 Month + 3.75%), 6.834%, 10/25/30		1,154,000	1,168,065
Connecticut Avenue Securities FRB Ser. 17-C05, Class 1B1, (ICE LIBOR USD 1 Month + 3.60%), 6.684%, 1/25/30		2,577,000	2,555,726
Federal National Mortgage Association 144A
Connecticut Avenue Securities Trust FRB Ser. 20-SBT1, Class 1B1, (ICE LIBOR USD 1 Month + 6.75%), 9.834%, 2/25/40		2,355,000	2,196,591
Connecticut Avenue Securities Trust FRB Ser. 19-R01, Class 2B1, (ICE LIBOR USD 1 Month + 4.35%), 7.434%, 7/25/31		653,000	655,055
Connecticut Avenue Securities Trust FRB Ser. 20-SBT1, Class 1M2, (ICE LIBOR USD 1 Month + 3.65%), 6.734%, 2/25/40		1,887,000	1,868,995
Connecticut Avenue Securities Trust FRB Ser. 20-R01, Class 1B1, (ICE LIBOR USD 1 Month + 3.25%), 6.334%, 1/25/40		347,000	326,650
Connecticut Avenue Securities Trust FRB Ser. 20-R02, Class 2B1, (ICE LIBOR USD 1 Month + 3.00%), 6.084%, 1/25/40		311,000	281,224
Connecticut Avenue Securities Trust FRB Ser. 19-R01, Class 2M2, (ICE LIBOR USD 1 Month + 2.45%), 5.534%, 7/25/31		15,442	15,413
Connecticut Avenue Securities Trust FRB Ser. 22-R02, Class 2M2, (US 30 Day Average SOFR + 3.00%), 5.281%, 1/25/42		2,198,000	2,006,534
HarborView Mortgage Loan Trust FRB Ser. 05-2, Class 1A, (ICE LIBOR USD 1 Month + 0.52%), 3.513%, 5/19/35		979,021	346,437
Home Re, Ltd. 144A FRB Ser. 21-2, Class B1, (US 30 Day Average SOFR + 4.15%), 6.431%, 1/25/34 (Bermuda)		1,000,000	867,823
JPMorgan Alternative Loan Trust FRB Ser. 06-A6, Class 1A1, (ICE LIBOR USD 1 Month + 0.32%), 3.404%, 11/25/36		1,425,774	1,268,031

MORTGAGE-BACKED SECURITIES (89.2%)* cont.		Principal amount	Value
Residential mortgage-backed securities (non-agency) cont.
LHOME Mortgage Trust 144A Ser. 21-RTL1, Class A1, 2.09%, 9/25/26 W		$511,000	$487,954
Morgan Stanley ABS Capital I, Inc. Trust FRB Ser. 04-HE9, Class M2, (ICE LIBOR USD 1 Month + 0.93%), 4.014%, 11/25/34		313,947	303,398
Oaktown Re III, Ltd. 144A
FRB Ser. 19-1A, Class B1B, (ICE LIBOR USD 1 Month + 4.35%), 7.434%, 7/25/29 (Bermuda)		695,000	691,132
FRB Ser. 19-1A, Class B1A, (ICE LIBOR USD 1 Month + 3.50%), 6.584%, 7/25/29 (Bermuda)		574,000	558,215
Radnor Re, Ltd. 144A Mortgage Insurance-Linked FRN Ser. 20-1, Class B1, (ICE LIBOR USD 1 Month + 3.00%), 6.084%, 1/25/30		430,000	386,667
Structured Asset Mortgage Investments II Trust FRB Ser. 06-AR7, Class A1BG, (ICE LIBOR USD 1 Month + 0.12%), 3.204%, 8/25/36		334,990	313,778
Towd Point Mortgage Trust 144A Ser. 19-2, Class A2, 3.75%, 12/25/58 W		862,000	779,371
WaMu Mortgage Pass-Through Certificates Trust FRB Ser. 05-AR8, Class 2AC2, (ICE LIBOR USD 1 Month + 0.92%), 4.004%, 7/25/45		597,025	536,244
Wells Fargo Home Equity Asset-Backed Securities Trust FRB Ser. 07-2, Class A3, (ICE LIBOR USD 1 Month + 0.23%), 3.314%, 4/25/37		729,408	704,479
			88,797,238
Total mortgage-backed securities (cost $475,043,816)			$431,700,007

ASSET-BACKED SECURITIES (0.9%)*		Principal amount	Value
1Sharpe Mortgage Trust 144A FRB Ser. 20-1, Class NOTE, (ICE LIBOR USD 3 Month + 2.90%), 3.025%, 7/25/24		$3,071,370	$3,063,692
Mello Warehouse Securitization Trust 144A FRB Ser. 21-3, Class D, (ICE LIBOR USD 1 Month + 2.00%), 5.084%, 11/25/55		1,216,000	1,134,943
Total asset-backed securities (cost $4,228,090)			$4,198,635

PURCHASED SWAP OPTIONS OUTSTANDING (—%)*
Counterparty Fixed right % to receive or (pay)/ Floating rate index/Maturity date	Expiration date/strike		Notional/ Contract amount	Value
Bank of America N.A.
0.485/3 month USD-LIBOR-ICE/Jan-25	Jan-24/0.485		$51,153,500	$8,185
Total purchased swap options outstanding (cost $95,913)				$8,185

PURCHASED OPTIONS OUTSTANDING (—%)* Counterparty	Expiration date/strike price	Notional amount		Contract amount	Value
JPMorgan Chase Bank N.A.
Uniform Mortgage-Backed Securities 30 yr 4.50% TBA commitments (Call)	Oct-22/$99.59	$95,140,600		$100,000,000	$100
Uniform Mortgage-Backed Securities 30 yr 5.00% TBA commitments (Call)	Oct-22/101.00	189,728,858		195,000,000	195
Total purchased options outstanding (cost $1,721,875)					$295

SHORT-TERM INVESTMENTS (19.7%)*		Principal amount/ shares	Value
Putnam Government Money Market Fund Class P 2.59% L	Shares	10,000	$10,000
Putnam Short Term Investment Fund Class P 3.11% L	Shares	8,479,918	8,479,918
State Street Institutional U.S. Government Money Market Fund, Premier Class 2.94% P	Shares	5,700,000	5,700,000
U.S. Treasury Bills 2.904%, 11/22/22 # ∆ §		$14,400,000	14,341,325
U.S. Treasury Bills 2.830%, 11/17/22 ∆ Φ §		13,800,000	13,750,838
U.S. Treasury Bills 2.800%, 11/15/22 ∆ Φ §		13,300,000	13,255,003
U.S. Treasury Bills 2.350%, 10/4/22 # ∆ Φ		11,628,000	11,627,220
U.S. Treasury Bills 2.847%, 11/25/22 ∆ Φ §		9,749,000	9,708,615
U.S. Treasury Bills 2.779%, 11/8/22 ∆ Φ §		9,328,000	9,302,733
U.S. Treasury Bills 2.922%, 12/1/22 ∆ Φ §		9,300,000	9,255,685
Total short-term investments (cost $95,423,987)			$95,431,337

TOTAL INVESTMENTS
Total investments (cost $1,269,098,222)	$1,195,853,884

Key to holding’s abbreviations
bp	Basis Points
FRB	Floating Rate Bonds: The rate shown is the current interest rate at the close of the reporting period. Rates may be subject to a cap or floor. For certain securities, the rate may represent a fixed rate currently in place at the close of the reporting period.
FRN	Floating Rate Notes: The rate shown is the current interest rate or yield at the close of the reporting period. Rates may be subject to a cap or floor. For certain securities, the rate may represent a fixed rate currently in place at the close of the reporting period.
IFB	Inverse Floating Rate Bonds, which are securities that pay interest rates that vary inversely to changes in the market interest rates. As interest rates rise, inverse floaters produce less current income. The rate shown is the current interest rate at the close of the reporting period. Rates may be subject to a cap or floor.
IO	Interest Only
LIBOR	London Interbank Offered Rate
OTC	Over-the-counter
PO	Principal Only
SOFR	Secured Overnight Financing Rate
TBA	To Be Announced Commitments

Notes to the fund’s portfolio
	Unless noted otherwise, the notes to the fund’s portfolio are for the close of the fund’s reporting period, which ran from October 1, 2021 through September 30, 2022 (the reporting period). Within the following notes to the portfolio, references to “Putnam Management” represent Putnam Investment Management, LLC, the fund’s manager, an indirect wholly-owned subsidiary of Putnam Investments, LLC and references to “ASC 820” represent Accounting Standards Codification 820 Fair Value Measurements and Disclosures.
*	Percentages indicated are based on net assets of $483,909,282.
#	This security, in part or in entirety, was pledged and segregated with the broker to cover margin requirements for futures contracts at the close of the reporting period. Collateral at period end totaled $1,610,833 and is included in Investments in securities on the Statement of assets and liabilities (Notes 1 and 8).
∆	This security, in part or in entirety, was pledged and segregated with the custodian for collateral on certain derivative contracts at the close of the reporting period. Collateral at period end totaled $38,617,162 and is included in Investments in securities on the Statement of assets and liabilities (Notes 1 and 8).
Φ	This security, in part or in entirety, was pledged and segregated with the custodian for collateral on certain TBA commitments at the close of the reporting period. Collateral at period end totaled $14,638,803 and is included in Investments in securities on the Statement of assets and liabilities (Notes 1 and 8).

§	This security, in part or in entirety, was pledged and segregated with the custodian for collateral on the initial margin on certain centrally cleared derivative contracts at the close of the reporting period. Collateral at period end totaled $13,337,829 and is included in Investments in securities on the Statement of assets and liabilities (Notes 1 and 8).
i	This security was pledged, or purchased with cash that was pledged, to the fund for collateral on certain derivative contracts (Note 1).
L	Affiliated company (Note 5). The rate quoted in the security description is the annualized 7-day yield of the fund at the close of the reporting period.
P	This security was pledged, or purchased with cash that was pledged, to the fund for collateral on certain derivative contracts. The rate quoted in the security description is the annualized 7-day yield of the fund at the close of the reporting period.
W	The rate shown represents the weighted average coupon associated with the underlying mortgage pools. Rates may be subject to a cap or floor.
	Unless otherwise noted, the rates quoted in Short-term investments security descriptions represent the weighted average yield to maturity.
	144A after the name of an issuer represents securities exempt from registration under Rule 144A of the Securities Act of 1933, as amended. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers.
	See Note 1 to the financial statements regarding TBA commitments.
	The dates shown on debt obligations are the original maturity dates.

FUTURES CONTRACTS OUTSTANDING at 9/30/22
	Number of contracts	Notional amount	Value	Expiration date	Unrealized appreciation/ (depreciation)
U.S. Treasury Note 2 yr (Short)	1,016	$208,676,876	$208,676,876	Dec-22	$3,211,150
Unrealized appreciation					3,211,150
Unrealized (depreciation)					—
Total					$3,211,150

WRITTEN SWAP OPTIONS OUTSTANDING at 9/30/22 (premiums $23,393,077)
Counterparty Fixed Obligation % to receive or (pay)/ Floating rate index/Maturity date	Expiration date/strike		Notional/Contract amount	Value
Bank of America N.A.
0.985/3 month USD-LIBOR-ICE/Jan-25	Jan-24/0.985		$51,153,500	$1,556,089
3.195/3 month USD-LIBOR-ICE/Nov-55	Nov-25/3.195		34,601,700	3,494,426
(3.195)/3 month USD-LIBOR-ICE/Nov-55	Nov-25/3.195		34,601,700	4,132,481
Citibank, N.A.
(1.865)/3 month USD-LIBOR-ICE/Oct-39	Oct-29/1.865		14,564,900	319,408
1.865/3 month USD-LIBOR-ICE/Oct-39	Oct-29/1.865		14,564,900	1,892,126
JPMorgan Chase Bank N.A.
(1.07)/3 month USD-LIBOR-ICE/Mar-32	Mar-27/1.07		9,579,400	59,775
(3.229)/3 month USD-LIBOR-ICE/Nov-33	Nov-23/3.229		35,660,900	903,291
1.07/3 month USD-LIBOR-ICE/Mar-32	Mar-27/1.07		9,579,400	974,225
3.229/3 month USD-LIBOR-ICE/Nov-33	Nov-23/3.229		35,660,900	2,284,794
Morgan Stanley & Co. International PLC
(2.97)/3 month USD-LIBOR-ICE/Feb-36	Feb-26/2.97		18,291,600	670,570
(3.01)/3 month USD-LIBOR-ICE/Feb-36	Feb-26/3.01		18,291,600	694,349
3.01/3 month USD-LIBOR-ICE/Feb-36	Feb-26/3.01		18,291,600	1,483,449
2.97/3 month USD-LIBOR-ICE/Feb-36	Feb-26/2.97		18,291,600	1,513,630

WRITTEN SWAP OPTIONS OUTSTANDING at 9/30/22 (premiums $23,393,077) cont.
Counterparty Fixed Obligation % to receive or (pay)/ Floating rate index/Maturity date	Expiration date/strike		Notional/Contract amount	Value
Toronto-Dominion Bank
(1.17)/3 month USD-LIBOR-ICE/Mar-55	Mar-25/1.17		$794,600	$8,987
1.17/3 month USD-LIBOR-ICE/Mar-55	Mar-25/1.17		1,589,200	565,294
UBS AG
(1.9875)/3 month USD-LIBOR-ICE/Oct-36	Oct-26/1.9875		16,895,300	300,229
1.9875/3 month USD-LIBOR-ICE/Oct-36	Oct-26/1.9875		16,895,300	2,245,218
Total				$23,098,341

WRITTEN OPTIONS OUTSTANDING at 9/30/22 (premiums $1,721,875)
Counterparty	Expiration date/strike price	Notional amount		Contract amount	Value
JPMorgan Chase Bank N.A.
Uniform Mortgage-Backed Securities 30 yr 4.50% TBA commitments (Put)	Oct-22/$99.59	$95,140,600		$100,000,000	$4,436,700
Uniform Mortgage-Backed Securities 30 yr 5.00% TBA commitments (Put)	Oct-22/101.00	189,728,858		195,000,000	7,189,260
Total					$11,625,960

FORWARD PREMIUM SWAP OPTION CONTRACTS OUTSTANDING at 9/30/22
Counterparty Fixed right or obligation % to receive or (pay)/Floating rate index/ Maturity date	Expiration date/strike		Notional/Contract amount	Premium receivable/ (payable)	Unrealized appreciation/ (depreciation)
Bank of America N.A.
(1.39)/US SOFR/Dec-26 (Purchased)	Dec-24/1.39		$176,037,200	$(2,024,428)	$5,333,927
1.39/US SOFR/Dec-26 (Purchased)	Dec-24/1.39		176,037,200	(2,024,428)	(1,286,832)
(1.085)/3 month USD-LIBOR-ICE/Apr-34 (Written)	Apr-24/1.085		115,721,600	1,588,279	1,198,876
2.25/US SOFR/Jan-33 (Purchased)	Jan-23/2.25		89,243,700	(1,447,078)	(1,295,819)
2.245/US SOFR/Jan-33 (Purchased)	Jan-23/2.245		89,243,700	(1,454,842)	(1,305,635)
2.415/3 month USD-LIBOR-ICE/Oct-33 (Written)	Oct-23/2.415		64,497,800	1,362,516	(6,010,550)
2.17/3 month USD-LIBOR-ICE/Apr-34 (Purchased)	Apr-24/2.17		57,860,800	(2,794,677)	(2,047,694)
(3.073)/US SOFR/Jun-37 (Written)	Jun-27/3.073		53,614,900	3,900,484	346,888
3.073/US SOFR/Jun-37 (Written)	Jun-27/3.073		53,614,900	3,900,484	(441,787)
(1.115)/3 month USD-LIBOR-ICE/Jan-26 (Written)	Jan-25/1.115		49,314,500	207,737	136,601
1.115/3 month USD-LIBOR-ICE/Jan-26 (Written)	Jan-25/1.115		49,314,500	207,737	(1,058,782)
(2.41)/US SOFR/Oct-32 (Written)	Oct-22/2.41		31,235,300	444,987	441,980
(2.42)/US SOFR/Oct-32 (Written)	Oct-22/2.42		31,235,300	444,112	441,042
(1.29)/3 month USD-LIBOR-ICE/Mar-34 (Written)	Mar-24/1.29		28,930,400	451,314	339,064
(3.101)/US SOFR/Jun-39 (Written)	Jun-29/3.101		21,231,500	1,658,180	51,805