Preview:
2Q24 highlights
- In the US, bond yields are likely to remain sensitive to whether growth and inflation are moderating. The expected Fed rate cuts later this year should help push market yields lower.
- In Europe, more pieces of the disinflationary jigsaw puzzle are falling into place, suggesting that the first rate cut will take place at the European Central Bank (ECB) June meeting.
- In the UK, we also see the Bank of England (BoE)as close to cutting, with the June meeting seen as most likely.
- In China, we maintain our view that officials will continue with an accommodative monetary policy stance given a number of economic headwinds.
Overview
Global growth has downshifted and inflation rates worldwide are generally receding. Deflationary pressures in China, tightening financial conditions in the US and Europe, and subdued demand for manufacturing and services across a number of countries are easing price pressures globally. These trends, coupled with the major central banks promoting a measured and gradual approach to easing monetary policy, are expected to further dampen economic growth and inflation, which, in turn, should lead to lower developed market (DM) government bond yields and a modestly weaker US dollar. That stated, concerns over monetary policy missteps, inflation rates stabilizing above central banks targets, stronger-than-expected growth in the US and increased US Treasury (UST) supply to cover a growing fiscal deficit are all phenomena that may lead to periods of heightened market volatility. Spread sectors such as emerging markets (EM), high-yield, bank loans and select areas of the mortgage-backed securities (MBS) space offer attractive yield, but we acknowledge their vulnerability to unanticipated shifts in macro-related sentiment, geopolitical developments and the ongoing uncertainty over monetary policy rate 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:
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.
Disinflation is a temporary slowing of the pace of price inflation and is used to describe instances when the inflation rate has reduced marginally over the short term.
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.