CONTRIBUTORS
Michael Buchanan, CFA
Co-Chief Investment Officer
Preview
4Q24 highlights
- In the US, the economy should continue to expand near trend well into 2025 as housing and consumer demand will be modestly helped by the recent decline in borrowing costs. We believe US bond yields remain high relative to pre-pandemic growth and inflation rates.
- In Europe, we see fiscal retrenchment next year as a further headwind to growth; we maintain our overweight duration via both nominal and real yields.
- In the UK, we think that the market’s terminal Bank Rate expectation still stands too high; we expect UK gilts to provide positive returns.
- In China, recent stimulus measures will help to temper cyclical headwinds, but structural balances will persist without deeper reforms.
Overview
Our base case calls for further weakening of global growth and further declines in inflation with a greater emphasis on services disinflation. Goods price inflation is running modestly below pre-pandemic levels, but with ongoing deflationary pressures from Asia, it’s hard to see a meaningful persistent uptick going forward. Services inflation remains elevated, but wage pressures are abating as job markets soften and service sector demand is slowing. Headline inflation is close to target in most advanced economies, which has allowed central banks to reduce policy rates as their inflation concerns lessen while growth concerns rise. Growth is slowing in the US and remains moribund in the rest of the world. At the same time lower policy rates and the recent Chinese stimulus package should lessen recessionary fears. We remain overweight to interest-rate duration, but less so as rates have fallen, and markets have moved closer to our base case. Spread sectors have performed well and we expect this to continue if the downward growth trajectory remains gentle and services disinflation continues. However, valuations have less yield advantage now to offset potential macro and political risks going forward. Emerging market (EM) debt appears to remain attractive fundamentally, but both internal and external political risks have hampered performance in some countries.
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.