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CONTRIBUTORS

Michael Buchanan, CFA

Chief Investment Officer
Western Asset

Preview

In his latest market commentary, Western Asset CIO Michael Buchanan examines the impact of rising public debt and market concerns over government fiscal policies. Elevated debt levels and fiscal policies have increased bond market volatility. Michael discusses the implications of global debt burdens by region with Western Asset’s key macro decision-makers.

Key takeaways:

  • Public debt in many countries has risen to historical highs relative to output. There are concerns that the sustainability of government debt burdens and the risk of higher government bond yields, particularly in longer maturities, could escalate the cost of servicing debt.
  • Elevated debt and concerns over debt sustainability and fiscal policies have been factors behind the increase in volatility in government bonds, especially in countries with higher debt levels such as the US, UK and France.
  • As discussed in our recent blogs, concerns about the extent and impact of the Trump administration’s tariffs and the direction of US fiscal policy have raised questions about the global demand for USTs and other major government bonds by non-domestic investors.
  • We recognize that over short periods some investors may seek to impose fiscal discipline on governments they perceive as profligate for raising their borrowing costs. Over longer periods, however, we are confident that trends in inflation, economic growth and central bank policy will remain the primary determinants of DM bond yields.
  • Higher tariffs could impact prices, clouding inflation and monetary policy outlooks, but the scale, persistence and policymaker responses are highly uncertain. We expect inflation to slow gradually to central bank targets, which should facilitate further rate cuts, especially if economies falter. These macro fundamentals should underpin bond market valuations despite significant and persistent government borrowing needs.

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Changes in the credit rating of a bond, or in the credit rating or financial strength of a bond’s issuer, insurer or guarantor, may affect the bond’s value.

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