CONTRIBUTORS
Michael Buchanan, CFA
Co-Chief Investment Officer
Preview:
3Q24 highlights
- In the US, bond yields are likely to take their cue from a cooling labor market, and moderating goods and services inflation. Expected US Federal Reserve (Fed) rate cuts later this year have the potential to push market yields lower, even as political uncertainty adds to volatility.
- In Europe, the rate-cutting cycle is underway, and we expect two more cuts later this year as the disinflationary trend persists.
- In the UK, confidence is growing for an imminent rate cut given slower wage growth, ongoing goods deflation and more slack in the labor market.
- In China, we do not expect any broad-based stimulus, but continued targeted measures to support its growth recovery.
Overview
Global growth and inflation rates continue to decline. Ongoing deflationary pressures in China, tightening financial conditions in both the US and Europe, and subdued demand for manufacturing and services in several countries are easing price pressures worldwide. These trends, coupled with a measured and gradual approach to easing monetary policy by major central banks, are expected to further dampen economic growth and inflation. This, in turn, should lead to lower developed market (DM) government bond yields and a modestly weaker US dollar. Concerns remain about potential monetary policy missteps, inflation rates stabilizing above central bank targets, stronger-than-expected growth in the US and increased US Treasury (UST) supply to cover a growing fiscal deficit. These factors could lead to periods of heightened market volatility. Spread sectors such as emerging markets (EM), high-yield bonds, bank loans and select areas of the mortgage-backed securities (MBS) space offer attractive yields but remain vulnerable to unanticipated shifts in macroeconomic sentiment, geopolitical developments and ongoing uncertain monetary policy trajectories.
Download the paper to view the Western Asset team’s views on key drivers and relative value by region, and sector and industry themes.
Definitions:
A Mortgage-Backed Security (MBS) is a type of asset-backed security that is secured by a mortgage or collection of mortgages. Agency mortgage-backed securities (MBS) are asset-backed securities secured by a mortgage or collection of mortgages issued by federal agencies like Fannie Mae, Freddie Mac and Ginnie Mae.
Developed markets (DM) refers to countries that have sound, well-established economies and are therefore thought to offer safer, more stable investment opportunities than developing markets.
Emerging markets (EM) are nations with social or business activity in the process of rapid growth and industrialization. These nations are sometimes also referred to as developing or less developed countries.
WHAT ARE THE RISKS?
Past performance is no guarantee of future results. Please note that an investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.
Equity securities are subject to price fluctuation and possible loss of principal. Fixed-income securities involve interest rate, credit, inflation and reinvestment risks; and possible loss of principal. As interest rates rise, the value of fixed income securities falls. International investments are subject to special risks including currency fluctuations, social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets. Derivative instruments can be illiquid, may disproportionately increase losses, and have a potentially large impact on performance. Liquidity risk exists when securities or other investments become more difficult to sell, or are unable to be sold, at the price at which they have been valued. Low-rated, high-yield bonds are subject to greater price volatility, illiquidity and possibility of default. Commodities and currencies contain heightened risk that include market, political, regulatory, and natural conditions and may not be suitable for all investors.
US Treasuries are direct debt obligations issued and backed by the “full faith and credit” of the U.S. government. The U.S. government guarantees the principal and interest payments on U.S. Treasuries when the securities are held to maturity. Unlike U.S. Treasuries, debt securities issued by the federal agencies and instrumentalities and related investments may or may not be backed by the full faith and credit of the U.S. government. Even when the U.S. government guarantees principal and interest payments on securities, this guarantee does not apply to losses resulting from declines in the market value of these securities.