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Market insights at a glance

In 3Q26, global fixed-income markets continue to navigate a complex backdrop as resilient growth, elevated inflation, hawkish central-bank pricing and the AI infrastructure buildout intersect. Growth remains supported by the US consumer, fiscal spending in Europe and AI-related capital investment, while inflation is expected to moderate through 2026 and into 2027. Spread sector fundamentals currently appear supportive. We currently see potential opportunities selective opportunities in high-quality AI-related issuance, BBB commercial mortgage-backed securities (CMBS), single-B bank loans, collateralized loan obligation (CLO) tranches and emerging market (EM) local currency debt where valuations compensate investors for risk. This summary is intended to aggregate the Firm’s current overall views and present an at-a-glance dashboard.

This quarterly update is intended to aggregate the Firm’s current overall views and present an at-a-glance dashboard covering the following:

  • Growth: Global growth remains supported by US consumption, pro-business policy, EU and German fiscal spending and Chinese exports, even as China’s property sector remains a headwind.
  • Inflation: Six-month annualized US core Personal Consumption Expenditures (PCE) has risen, but fading tariff effects, lower energy pass-through, housing disinflation and lower owners’ equivalent rent should support moderation into 2H26 and 2027.
  • Rates: Shorter-dated rates have adjusted meaningfully higher, while longer maturity yields have moved up by less. Western Asset sees value in moderate duration exposure where yields compensate investors and curve positioning can provide diversification in credit-heavy portfolios.
  • Credit Markets: Spreads are generally fair rather than cheap. AI infrastructure financing is expanding supply across investment-grade credit, private credit and securitized markets, creating opportunities where issuer quality, structure and spread compensation are attractive, while also increasing the need to monitor cash-flow use and execution risk.
  • Labor Markets: The US unemployment rate has moved below 4.2%, and broader private-sector job creation supports consumption. This keeps the Federal Reserve (Fed) focused on inflation but does not, in Western Asset’s view, require additional policy tightening.
  • Monetary Policy: Markets have moved toward a more hawkish policy path, but Western Asset believes incoming data should validate a cooling inflation trend. That argues for policy stability in the US and fewer hikes globally than are currently priced.

Fixed-Income Overview and Outlook: Resilient Growth, Hawkish Policy and an AI Financing Wave

In the third quarter of 2026, global fixed-income markets are navigating an unusual combination of resilient growth, elevated but potentially moderating inflation, higher central-bank policy rate messaging and a powerful AI infrastructure cycle. Growth has absorbed tariff pressure, energy volatility and geopolitical concerns, while consumer spending, fiscal support and AI-driven capital investment continue to provide momentum.

Inflation remains the primary constraint on policy flexibility. Realized inflation measures are above target, but several contributors to the recent reacceleration appear likely to fade, including US tax-related support for consumption, tariff impacts and the transmission of higher energy costs. Western Asset expects inflation to move lower in the second half of 2026 and into 2027, which supports the view that market-implied policy rate hiking paths may be somewhat overdone.

Credit markets reflect a healthy fundamental backdrop, but tight spreads leave less room for broad beta exposure. The opportunity set is more idiosyncratic, with emphasis on select high-quality new issuance, AI-related financing with strong issuer fundamentals, single-B bank loans, BBB CMBS, CLO tranches and EM local currency debt where valuations remain attractive.

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