Where To Find Value In Global Fixed Income Markets

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Global fixed income manager Western Asset is forecasting “very strong growth” in gross domestic product during the second half of the year as the world economy reopens.

However, in its latest Global Outlook report, Western Asset said it was cautious about extrapolating short-term cyclical boosts into a presumption of a higher secular trend rate of growth or inflation.

“The secular challenges that have kept US and global growth to a moderate pace at best over the last several decades persist,” Western Asset’s report said.

“These include the stagnation of Western societies’ middle- class wages, ageing demographics and rising global debt burdens. Moreover, the small and medium-sized business destruction in many countries not seen since the Great Depression may take years to replace.

“Given this backdrop, Western Asset expects central banks to remain extraordinarily accommodative for the foreseeable future.”

Australian outlook

Western Asset’s report highlighted how the reopening of the economy ahead of the schedule laid out by both the government and the Reserve Bank of Australia in late 4Q20 hasn’t changed their conviction with regard to holding monetary policy in a super easy stance.

They still forecast no change in the cash rate for at least three years despite the progress made to date, which has the market questioning the soundness of this as property prices increase sharply.

“We favor the high-grade supranational debt sector with a focus on the mid-curve 7- to 10-year bonds,” the report said.

“We do not favor semi-government bonds that now look expensive thanks to quantitative easing (QE) buying. Current swap curve volatility will also drive value here on the curve.”

The report provided a summary of key drivers and also identified where Western Asset saw value in global fixed-income markets.

CANADA: “Provincial and corporate spreads are expected to remain near current narrow levels as the Canadian economy continues to reopen. While longer-term bond yields may still move higher, we don’t expect the two rate hikes by the Bank of Canada that are already priced into the 2022 curve.”

UK: “The BoE is concerned about rising gilt yields like many other central banks, but the threshold to increase bond purchase programs is high. We feel that the market is pricing too fast a degree of monetary policy normalization, however. We are currently agnostic on the currency but could see downside risks emerge from a trade and capital flow perspective.”

US: “We expect rates to remain range-bound with duration (at the back end of the curve) serving as a valuable risk-off hedge.”

EUROPE: “With the recent rise in global core rates and stepped-up ECB purchases, we see very moderate room for spread compression in higher-risk sovereigns as valuations should remain supported by ECB purchases.”

JAPAN: “We expect a steeper yield curve, especially in the super-long end as the front end and intermediate part of the curve are likely to stay low under the yield curve control framework by the BoJ.”

The report also noted:

  • Absent a complete full-capacity reopening of restaurants, hotels, airports, theaters, etc. and with manufacturing and homebuilding already having fully recovered, Western Asset is inclined to think that realised US growth will fall short of the expectations that seem to be built into current market pricing.
  • Rebound expectations for continental Europe have been hampered by the slow vaccine rollout and by renewed lockdowns in Q1 and early Q2. Western Asset views this as a delay in the economic rebound rather than a fundamentally altered trajectory, especially as vaccine supply is picking up markedly in Q2.
  • Western Asset continues to expect China to be an anchor of stability for growth, though such growth will increasingly be domestically driven with less spill over demand from the rest of the world.
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Staff Writer
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