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.
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.
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.
After the political tsunamis of 2016 —with the unexpected decisions by the British to leave the EU, and the Americans to elect Donald Trump president— the political nexus in 2017 shifted to the Eurozone. After the Dutch vote, it's not the turn of France and, later this year, Germany —both vulnerable to the rising populist tide.
Market & Strategy Update
Keeping in mind the enormous amount of policy uncertainty there is around the world and particularly in the US, upside growth prospects are coming amidst challenging secular headwinds and a constrained global growth background.
Chart of the Week
Source: Bloomberg and Legg Mason, Jan 18, 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
For unemployment claims, the devil was in the details; Global oil looked to offer its own cure for high crude prices; China growth beat expectations
Western Asset examines recent trends in the muni bond market and provides its outlook about conditions ahead.
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.
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
Active management may be valuable for municipal bond investors today.
The lessons from the 2013 taper tantrum are relevant for bond investors today, but as circumstances are different we do not expect a similar outcome.
Steady growth and moderate inflation:
Western Asset CIO Ken Leech explains why growth and inflation expectations have proven more optimistic than fundamentals could support. His base case continues to be slow but steady US growth and moderate inflation -- and that spread sectors will continue to be an attractive opportunity for fixed income investors in this environment.
Western Asset Global Outlook
The current steady but unspectacular global growth backdrop has not materially changed. We remain optimistic that global growth of around 3% is sustainable while recognizing that high debt loads and other headwinds, including low productivity and...
Ken Leech Commentary
Until recently, the market consensus was one of “secular stagnation,” predicting anemic growth for the indefinite. Today, the prevailing theme is “global reflation,” calling for synchronized global growth that will lead to self-sustaining recoveries around the world. Western Asset has a different view. Read more.
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.
A top national priority
With bipartisan support at every level of government, investors are likely to see more infrastructure investment opportunities surface faster.
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