Western Asset examines recent trends in the muni bond market and provides its outlook about conditions ahead.
The Western View
Today, fears dominate the financial news, and we have a slightly more cautious tone overall. Yet despite prevalent fears, we remain bullish on several sectors within fixed income – and continue to see opportunity.
French election update:
Some worry about a political tsunami. But so far, it looks like a four-way tie. The least likely outcome, a Le Pen / Mélenchon run-off, could trigger significant market volatility, providing attractive opportunities for astute investors.
Municipal bonds are a tried and true way to finance the much needed infrastructure projects that will raise the quality of life for so many Americans.
Emerging Markets Insights
In light of concerns over China’s rising leverage, yuan stability, capital outflows and risks to emerging economies, Western Asset’s Portfolio Manager and Head of Investment Management, Asia (ex-Japan) Desmond Soon shares what we can expect from China’s financial markets in the next six months. He goes into detail about why we think a debt crisis in China is not likely, the safeguards in place to help ensure financial stability and the steps China is taking to encourage more foreign investments to conclude that China’s fixed-income market continues to be an attractive option for global bond investors. READ MORE.
Chart of the Week
Source: Bloomberg, April 19, 2018 Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.
Chart of the Week
OPEC’s meeting had some unexpected commentary; the Fed heard tales of good times; Bank of England surprised its markets.
February’s Market Volatility
In the last two years, market sentiment has swung from pessimistic “secular stagnation” to today’s “reflation trade” enthusiasm. As optimists, we have focused on the higher-yielding spread sectors. But despite market optimism about accelerating growth, the need to protect against unpleasant surprises remains crucial.
Various Federal Reserve (Fed) policymakers expect US inflation to accelerate in 2018, and market analysts generally agree with them. Of course, these same folks predicted rising inflation in previous years as well. It didn’t happen then, and we think it is unlikely to happen in 2018.
The transition from Janet Yellen to Jerome Powell as chair of the Federal Reserve (Fed) is happening at an interesting moment for financial markets and the US economy. Two topics in particular have recently come to the fore of investors’ minds: the potential for an increase in inflation and the current pricing of Fed interest rate hikes. We address both in the final section of this note. However, some context is needed first. Before addressing the topics du jour, we assess Yellen’s record and then provide an outlook for the Fed under Jerome Powell. It is only with the context properly established that we can attempt to adequately address the issues of the day.
The credit cycle is still in expansion mode, and investors who run for cover too early may regret missing out on incremental returns.
In this Q&A, Western Asset Portfolio Manager and Research Analyst John Bellows discusses the outlook for growth and inflation, the impact of recent tax cuts, the maturity of the current business cycle and where to find value in the market when everything seems expensive. Read more.
US Mortgage Market
The US mortgage market is markedly stronger and simpler in the aftermath of the subprime credit bubble that led to the financial crisis. For investors, the mortgage market is attractive today as a result of greater protections for bondholders, better mortgages backing those bonds and a healthier US housing market and consumer. Read more.
The big picture in bonds
The slow but steady recovery since the financial crisis continues to make progress; looking ahead, we expect another 2+% growth year in 2018, perhaps better with the new tax law. The fundamental investment backdrop is exceptional, but prices are high -- so sector and security selection remain key.
Ken Leech Commentary
On November 2, President Donald Trump named Jerome Powell the next Chair of the Federal Reserve (Fed) Board, succeeding Janet Yellen. This confirmed our thesis that the Trump Administration would be looking for Fed candidates who were 1) pro-growth, 2) comfortable with low short-term interest rates, 3) open to a lighter touch toward financial regulation, and 4) members of the Republican Party.
The big picture in bonds:
The market’s enthusiasm for massive growth immediately following last year’s US presidential election waned significantly after healthcare initiatives failed to materialize, infrastructure spending stalled and geopolitical tensions flared. While we were skeptical of too much optimism at the start of the year, we now think pessimism may be too strong as fundamentals slowly and steadily improve.
Increased banking regulation and constrained lending makes a strong case for investment opportunities in residential, commercial and consumer loans. Anup Agarwal, head of agency and structured products at Western Asset, explains why.
Looking beyond the obvious
Current yields and spreads are creating the perception that fixed income isn’t offering much value, but Western Asset Deputy CIO Michael Buchanan does see pockets of opportunity in several segments of the market.
“[Yellen] is not a Republican. When her time is up, I would most likely replace her because of the fact that I think it would be appropriate.” “[Yellen] is a low-interest-rate person, she’s always been a low-interest-rate person, and let’s be honest, I’m a low-interest-rate person.” ~Donald J. Trump, CNBC Interview, May 5, 2016
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