Why Western Asset believes the current positive phase of the credit cycle will likely continue.
Western Asset examines recent trends in the muni bond market and provides its outlook about conditions ahead.
The assumptions behind the curve
Municipal bond investors can be fickle, leading to weakness in munis, but we believe today's muni markets have priced in a large surprise in the macro backdrop, which is not our base case.
Further hikes are unlikely
The upcoming "Fed Listens" schedule of public events is unlikely to result in major policy changes. We also doubt the upcoming shift in the Fed’s inflation strategy will have any significant effect on inflation expectations, except to make rate hikes even less likely in 2019.
The implications for trade, how Mexico may respond, and what it means for Mexican rates and asset prices.
Chart of the Week
Chart courtesy of Royce & Associates. Source: Bloomberg, as of 6/30/19. 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
China’s latest tariffs focus on U.S. agricultural exports; financial markets are pricing in at least one Fed rate cut this year; U.S. consumers’ debt load reached $13.67 trillion, with student debt outstripping auto loans.
There's reason and room for more rate cuts ahead, but it's unclear if that includes September.
Commercial Real Estate Finance
These real-estate loan securities are growing in number, requiring strong, fundamentals-based analysis.
3Q 2019 Market & Strategy Update
The Fed and other central banks have started focusing on core inflation outcomes - a decisive policy shift which suggests that rates will be "low for longer" than previously expected.
As threatening as natural disasters can be, their impact on the municipal bond market remains fairly muted.
Focus on the Economy
Despite widespread worries about the yield curve, what we've seen recently is not a true inversion. But preventing that from occurring is one reason the Fed could move to lower rates later this year.
Understanding the causes
What's behind the persistently low inflation that could drive the Fed to cut rates this year? A host of factors suggest the Fed's 2% target for inflation is overly optimistic.
June Meeting Analysis
Wednesday's Fed statement makes a rate cut in July the base case for investors, with a 25-basis-point move most likely.
Though still highly unlikely, we do not entirely rule out an all-out trade war. It would take near-complete disruption of trade flows to threaten recession in the US.
The bond market has already priced in cuts later this year. Though possibly ahead of itself in terms of timing, the market’s call on the direction of rates looks right, notes Western Asset’s John Bellows.
German bunds have become a lightning rod for market anxiety; Western Asset's Gordon Brown argues that too much bad news is built into current pricing, obscuring some key long-term macro drivers.
Q2 Market Commentary
We remain cautiously optimistic that the Fed will see the light, that Brexit will move in a benign fashion, and that tariff disputes will subside. Spread sectors and duration remain our focus.
Despite the downbeat outlook, we believe rates still have appeal at current levels, with additional interest rate cuts possible to counter the country's growth challenges.
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