China’s local onshore bond market is now the third largest bond market in the world, just behind those of the US and Japan, with approximately US$12 trillion in...

Following a turbulent year-end for global equity markets in 2018, Lead Portfolio Manager and Deputy Chief Investment Officer Michael Buchanan and Product Specialist Robert Abad check in with the Western Asset Multi-Asset Credit...

Western Asset CIO Ken Leech updates his views on the progress of the global economic recovery, including his thoughts on growth, inflation and the need for continued monetary...

As ESG discussions become more widespread among investors, Global Head of ESG Investments Bonnie Wongtrakool and Research Analyst Wontae Kim provide a thoughtful analysis...

For anyone living in the United Kingdom since the Brexit vote in 2016 the unfolding tragicomedy has rivaled anything that even this country’s great bard William Shakespeare scripted at his creative peak. Reality has indeed been stranger than fiction. This brief note attempts to look beyond the curre...

This note describes our outlook for the Federal Reserve (Fed) in...

The following commentary is a high-level summary of our views for the year ahead. This is of course a snapshot of this moment in time wherein we describe some of the most significant matters of interest for fixed-income investors. The “Big Picture” table that begins on page 4 provides an at-a-glance...

This year, investors have been blindsided by bouts of sudden and sharp volatility across equity, fixed-income, commodity and currency markets. Market angst has been amplified by fears of slowing global growth, the inability of central banks to inspire confidence around policy normalization, tighter ...

This year’s early expectations for synchronized growth were dashed rather quickly. Instead, we have seen 2018 become the year of the most desynchronized global growth since 1998. The US economy, supercharged with late-cycle stimulus, has gone from strength to strength; the rest of the world, challen...

Fannie Mae and Freddie Mac will be making important changes to how their mortgage-backed securities (MBS) are issued, effective June 2019. As these changes may affect investors’ related MBS investments, this note describes the rationale for the change, how UMBS investments will work after the effect...

We sat down with Portfolio Manager and Head of Global Investment-Grade Credit Ryan Brist and Product Specialist James So to discuss general concerns over deterioration of the domestic credit market and specific concerns about the growth of the BBB quality cohort. Ryan and James also delve into histo...

This note describes our current outlook for the eurozone and includes an analysis of economic growth, inflation and expectations for European Central Bank (ECB) policy. We explore how these factors influence our strategic underweight duration stance in core European...

Investors in Australia retain one of the lowest allocations to the fixed-income asset class in the developed world. While this is a concerning fact, what is more alarming is that these assets have been allocated to cash and term deposits. There is undoubtedly a structural element to this allocation ...

The multi-year global bond rally has some market commentators setting high risk and low return expectations for Australian fixed-income markets. This picture is normally based on scenarios where rates increase across the curve, from the Reserve Bank of Australia’s (RBA) cash rate to longer maturitie...

The Federal Reserve Open Market Committee (FOMC) responded to better than expected US growth by raising interest rates in June. The most recent economic data has generally maintained its firm tone. The FOMC will accordingly raise rates at the upcoming September meeting and potentially again in Decem...

At Western Asset we receive requests regarding our thoughts on the credit cycle almost every day. We published our opinions in a paper earlier this year titled, Where Are We in the Credit Cycle? In that paper we argued that credit markets remained squarely within the expansion phase. In this note, ...

The move to replace LIBOR is being driven by a couple of primary factors, and has been a long time coming. In this note, Western Asset Product Specialist Tom McMahon discusses these factors and explains the roots of the international investigation into LIBOR, its possible replacement, why the chang...

In this brief note, we describe Western Asset’s framework for incorporating environmental, social and governance (ESG) factors into our sovereign analysis. Our goal is to help readers understand how we approach sovereign ESG investing and how ESG can complement “traditional” sovereign investment ana...

The deep malaise that gripped the global economy in the aftermath of the global financial crisis (2010-2016) was starting to lift in 2017. The global recovery was broadening and becoming less fragile. For the US, seemingly every one of those years had started with Federal Reserve (Fed) optimism abou...

Market participants are increasingly concerned that the Trump Administration’s ongoing tariff crusade against China and other global trading heavyweights might be the tinder that could ignite a full-blown trade war. While such a risk should not be underestimated, we are cautious about leaping to any...

Western Asset has a truly global focus, with investment professionals around the world seeking out the best fixed-income investments for the benefit of our clients. In this Q&A, one of our leading regional investors—Desmond Soon, Portfolio Manager and Head of Investment Management, Asia (ex-Japan)—a...

With yields currently at historical lows, it’s increasingly common for investors to look for ways to use fixed-income as a reliable source of total return in their broad investment portfolios. In this paper, Product Specialist Robert Abad provides a timely reminder about what really drives fixed-inc...

There is no doubt that we have been living through an extraordinary period of economic stability, characterised by low but stable global growth and fueled by central bank largesse, persistently low or even negative interest rates and a seemingly insatiable appetite for risk assets. Given this extend...

The recent volatility spike in developed markets (DM) rates has rippled onto both hard currency and local currency emerging markets debt (EMD). Not to be dismissive of market spillover, but we do not view the broad market rout as sufficient basis to steer away from our strategic course. To be sure, ...

The uneven nature of the global recovery has reared its ugly head again. The optimism for a global synchronized recovery at the beginning of the year has given way to anxiety over potential emerging markets (EM) or European crises. The divergence in performance between the US bond market and markets...

As exemplified by the Chinese characters “危机”, danger is simultaneously a warning and an opportunity for investors who have the experience, resources and courage to exploit them. Western Asset has investment professionals from three countries serving global investors in the Asia Pacific region. In t...

An overweight to US rates has been a high-conviction position for Western Asset this year. The position is based on three related views: US growth would not accelerate materially, inflation risks would continue to be to the downside and the Federal Reserve’s (Fed) reaction function would be less haw...

We sat down with Lead Portfolio Manager and Deputy Chief Investment Officer Michael Buchanan and Product Specialist Robert Abad to discuss the Western Asset Multi-Asset Credit (MAC) strategy. Since its inception in 2010, this unconstrained strategy has sought to maximize income and expected total re...

It is hard work for a defined benefit (DB) plan’s assets to keep up with or overtake its liabilities and especially so when the plan is underfunded. Granted, DB plans are typically locked onto the task of targeting plan asset returns, but it is our experience that plans often lose sight of this goal...

In response to the great financial crisis that culminated in 2008, central banks around the world sprang into action to provide liquidity and to calm markets with large-scale asset purchases. Now, as the world economy stabilizes a decade later, the three largest central banks—the US Federal Reserve ...

A key question asked by many clients today—aside from where bond yields are headed—is regarding where we think the US dollar is headed. This is an important question as the returns of any fixed-income portfolio with developed or emerging markets (EMs) currency exposure will be inextricably linked to...

Recent developments have raised the specter of a “trade war” with China and concerns about the attendant consequences. At this point, such concerns have perhaps run ahead of the actual developments. The tariffs on Chinese goods have not yet been implemented, and they are subject to a lengthy review ...

In our recent paper, ESG Essentials: What You Need to Know About Environmental, Social and Governance Investing, we discussed the surge in interest in ESG, the range of ESG investment styles and investor motivations for adopting ESG. As we explained in that paper, investors define1 ESG in a variety ...

The level of discourse around the value of Environmental, Social and Governance (ESG) investing has increased in recent years, leading many to consider whether and how to incorporate ESG across their own portfolios. Generally, ESG investing aims to increase “responsible investments” by factoring ESG...

Successful portfolio construction involves not only the selection of superior securities and investment themes, but also the assessment of the ranges of outcomes of the portfolio’s exposures. The best portfolios carefully balance risk and reward. An important part of assessing portfolio risk is the ...

As a senior leader of the investment strategy process at Western Asset for over 27 years, I’m very gratified with the returns we’ve been able to generate for our clients. While there are no guarantees, at Western Asset we feel very strongly that our value-driven investment process combined with our ...

Various Federal Reserve (Fed) policymakers expect US inflation to accelerate in 2018, and financial market analysts generally agree with them. Of course, these same folks predicted rising inflation in previous years as well. It didn’t happen then, and we think it is unlikely to happen in 2018. It is...

A little under two years ago the market and academic financial commentary were focusing on “secular stagnation.” This was the idea that global growth and inflation were so constrained by secular forces that policymakers and investors should focus on the need to protect against the persistence of dow...

In recent years we have seen a marked increase in client interest for global bonds, reflecting the potential investment return and diversification benefits available outside of domestic markets. This brief overview reviews how Western Asset approaches global bond investing—supported by our enduring ...

The transition from Janet Yellen to Jerome Powell as chair of the Federal Reserve (Fed) is happening at an interesting moment for financial markets and the US economy. Two topics in particular have recently come to the fore of investors’ minds: the potential for an increase in inflation and the curr...

In this Q&A, Western Asset Portfolio Manager and Research Analyst John Bellows discusses the outlook for growth and inflation, the impact of recent tax cuts, the maturity of the current business cycle and where to find value in the market when everything seems...

The US mortgage market has evolved significantly in response to the subprime mortgage crisis. The crisis was the direct result of an inflated housing market fueled by a credit bubble in mortgage lending, with subprime lending defining its pinnacle. We see neither of these conditions present today; h...

In the timeless folktale Chicken Little, while tending to her garden an acorn drops on Henny Penny’s head and she declares, “Goodness gracious, the sky is falling!” As it turns out, the sky did not fall but that mattered little to the duck and goose who met with a tragic end after Henny led them to ...

Western Asset’s leadership in the field of unconstrained investing rests on two pillars: Clarity of goals and a disciplined investment approach. This note is a review and update of how we approach the field of unconstrained investing. Briefly, we feel each investor needs to establish a framework for...

The experience of investing in emerging markets (EM) local debt during the period from 2013 to 2015 was analogous to that of peeling an onion. It was not for the faint of heart; as layers were removed, it was a constant battle to hold back tears. Investors during that period truly experienced a “per...

Western Asset’s Multi-Asset Credit (MAC) strategy is currently celebrating its seven-year anniversary. We sat down with Lead Portfolio Manager and Deputy Chief Investment Officer Michael Buchanan to discuss MAC’s key features and how the portfolio’s current position seeks to take advantage of today’...

On November 2, President Donald Trump named Jerome Powell the next Chair of the Federal Reserve (Fed) Board, succeeding Janet Yellen. This confirmed our thesis that the Trump Administration would be looking for Fed candidates who were 1) pro-growth, 2) comfortable with low short-term interest rates,...

In this Q&A, Western Asset’s Head of the Tokyo Investment Team, Kazuto Doi, addresses questions about our Currency Alpha strategy. He explains how this currency-focused strategy aims to generate a competitive positive return, irrespective of the market environment for global...

Global financial regulation continues to evolve and shape the behavior of investors. For the insurance industry in Europe, the impact of Solvency II—which sets forth guidelines concerning the amount of capital that insurers must hold to reduce the risk of insolvency—continues to permeate. Recently, ...

The daily barrage of headlines on tax reform can be dizzying. Rather than attempting to anticipate every twist and turn—a mug’s game if ever there was one—investors may do better taking a broader perspective. This note is an attempt to do just that. We first take a view on the chances of tax reform ...

Currently, when crafting LDI solutions for defined benefit (DB) schemes, the pension community tends to focus attention on matching the duration of assets with liabilities. In our recent LDI Insights, Duration Is a ZIP Code, Not an Address, my colleague Mike Bazdarich explains precisely why this is ...

According to recent flow data, investors continue to embrace asset classes that exhibit equity-like behavior given their perceived propensity to generate the highest returns. But with global equities moving to new highs, global bond yields declining and broad market volatility skimming record lows, ...

Introduction The financial industry in Europe is about to change. Stricter oversight regulation intended to enhance investor protection, preserve market integrity and improve overall transparency will become effective on 3 January 2018. The new regulation is known as MiFID II—the sequel to the exist...

Today the Federal Open Market Committee (FOMC) announced a reduction in its reinvestment of maturing bonds. Most of the details have been out for a while, and all that really happened today was making the plan official by including it in the FOMC statement. Western Asset has written extensively on t...

The US is expected to reach its current $19.8 trillion debt limit sometime in early- to mid-October, according to Congressional Budget Office estimates. On July 28, Treasury Secretary Steven Mnuchin sent a letter to Congress asking for a statutory increase by September 29. In the letter, he asked fo...

The US economic recovery continues. US unemployment is back to pre-crisis levels at 4.3%, the global economy is finally perking up, the Federal Reserve (Fed) is holding steady on its gradual path to normalization yet core inflation in the US is still refusing to bounce. One might even make the case ...

In light of concerns over China’s rising leverage, yuan stability, capital outflows and risks to emerging economies, Western Asset’s Portfolio Manager and Head of Investment Management, Asia (ex-Japan) Desmond Soon shares what we can expect from China’s financial markets in the next six months. He g...

With Janet Yellen’s term ending in February 2018, the sweepstakes for Federal Reserve (Fed) Chair is heating up. Media stories about who is favored are appearing with increasing frequency and attracting a lot of attention. Potential candidates are trying to raise their profiles and thereby increase ...

When a signal from the Federal Reserve (Fed) regarding its plans to “step down” asset purchases in 2013 led to a sharp sell-off in markets—as bonds, risk assets, and especially emerging markets (EMs) all moved down in price simultaneously—the taper tantrum of 2013 had arrived. Now in 2017, central b...

It was 10 years ago this month that we saw the start of a significant widening of spreads in bank bonds and the corporate credit markets more generally. Since then, bank regulation globally has played a critical role in transforming the business model from a casino-like venture into a less volatile ...

At the start of 2017, Federal Reserve (Fed) members began sharing their views on the Fed’s balance sheet with increasing frequency. This renewed attention to balance sheet normalization brought back memories of the 2013 “taper tantrum,” with some investors warning that the Fed’s exit from the Treasu...

With UK government gilt yields near historic lows, the prevailing wisdom is that gilts are now prohibitively expensive and wise investors should steer clear. For those of us with long memories, this view is reminiscent of the experience of the Japanese government bond market 20 years ago, when Japan...

It is not the strongest of the species that survives, nor the most intelligent, but the one most responsive to change. ~Leon C....

On September 22, 2015, the US Securities and Exchange Commission (SEC) released a 415-page document—Investment Company Act Release No. 31835—that proposed “…rules and forms designed to promote effective liquidity risk management throughout the open-end fund industry, thereby reducing the risk that f...

In 2012, Western Asset set out to develop an aggressive, unconstrained fixed-income strategy—Macro Opportunities (MO)—to offer our clients the opportunity to generate returns in a slow-growth, low-rate environment. It needed to be both opportunistic and defensive, yet offer a compelling risk/reward ...

When to hold and when to fold—the keys to success that every gambler knows. Prime Minister Theresa May clearly didn’t heed that sentiment when she decided in mid-April to call an early election, thereby forsaking a guaranteed three further years as Prime Minister for the prospect of a larger and lo...

The Federal Reserve (Fed) raised the federal funds target rate as expected on Wednesday despite unspectacular growth, underwhelming inflation and only modest wage growth. The Fed certainly took all of these factors into account, as well as considering the positive growth in the US and improving grow...

You are a defined-benefit (DB) pension plan sponsor who has improved funded status to the point where you want to seriously de-risk via a customized Liability Driven Investing (LDI) solution. What kind of allocation should you adopt? Most of our competitors would advise building a solution portfolio...

Less than a year ago, a prevailing topic of discussion among the economic academic community and market participants was “secular stagnation.” Developed countries would have paltry growth for the indefinite future. Policies and planning would have to adapt to this reality. Commodity prices had plumm...

The path of global inflation is rightly never far from the minds of monetary policymakers and investors. Until recently, however, the global central banks’ emphasis has been upon avoiding deflation rather than restraining inflation. Last year’s US election result changed this, fostering a fiscally l...

In today’s low-interest-rate world, finding an attractive source of income remains a challenge for individual investors, pension funds and institutions globally. The challenge stems from both the myriad investment opportunities now available, as well as the inherent complexities surrounding asset al...

Western Asset continues to be constructive on emerging markets debt (EMD) as we believe fundamentals, valuations and technicals are still likely to be supportive of the asset class over the medium-term. Global central bank accommodation has helped remove tail-risk scenarios and put a floor on global...

With just under a week to go, the first round of the French presidential elections is upon us, and some worry it will follow in the footsteps of the political tsunamis of 2016. Until recently seemingly a two-horse race, the polls now suggest convergence on an almost-equal probability for each of the...

Judging by financial market reaction and popular opinion, there is a strong consensus that prospective tax reform policies will lead to upward pressure on interest rates. We will argue here that the effects of reductions in marginal tax rates are at worst uncertain and that the presumption actually ...

Through its first quantitative easing (QE) program, the Federal Reserve (Fed) began purchasing agency mortgage-backed securities (MBS) in November 2008 and US Treasuries (USTs) in March 2009. Since ending its third asset purchase program (QE3) in 2014, the Fed has continued to participate actively i...

Since our founding in 1971, Western Asset has grown to become one of the world’s leading fixed-income managers—yet our core philosophy remains unchanged. We believe in “value” and we believe in “diversification,” two tenets that are critical for success in meeting our clients’ investment objectives....

After the political tsunamis of 2016—with the unexpected decisions by the British to leave the EU, and the Americans to elect Donald Trump president—the political nexus in 2017 shifts to the eurozone. The coming months herald parliamentary and presidential elections in the Netherlands, France and Ge...

We believe global bonds should have a role in your broad investment portfolio. The global bond market has grown dramatically over the past 20 years due to a number of secular forces and now offers investors a much richer universe of investment opportunities across a number of regions, sectors and cu...

Infrastructure may be the only area where bipartisan action by this Congress predictably can create large numbers of solid jobs, enhance growth and income opportunities for American investors, and help invigorate our economy. Our country needs...

Since the onset of the financial crisis, we have been steadfast optimists that the global and US recoveries would be ongoing. Our feeling is and has been that despite the enormous headwinds facing global growth, the natural economic healing process, the persistence and ingenuity of the human spirit,...

In this Q&A, Portfolio Manager Timothy J. Settel outlines why we believe bank loans present an attractive investment opportunity. ...

The surprise election of Donald Trump continues to be the focus for investors. The prospect of a new policy environment, and the various attendant risks, have led to a rethinking of economic forecasts and significant repricing across asset classes. The outlook for the Federal Reserve (Fed) is, of co...

Given the high degree of uncertainty around the agenda of the incoming Trump administration, Western Asset is focused on reviewing the implications of potential initiatives on the fixed-income markets and identifying value opportunities for client portfolios. Treasury Secretary nominee Steven Mnuch...

On November 8, 2016, Donald Trump was elected president of the United States. The result was a shock to most, possibly including Mr. Trump. Most—although not all—opinion polls pointed to a Hillary Clinton win. Betting markets were even more unequivocally pro-Clinton. Prediction markets such as the I...

In this Q&A, Portfolio Manager Frederick Marki and Product Specialist Travis Carr discuss Western Asset’s US Core strategy. With many investment options available, Mr. Marki and Mr. Carr explain why US Core is still relevant to today’s...

While our fundamental philosophy, process and view of risk management have always remained the same, we are continually working to enhance our risk management process to meet evolving demands. One such enhancement has been a multi-year initiative to develop a proprietary risk system: Western Informa...

Most corporate defined benefit (DB) plans continue to follow a risk-on strategy, positioned to benefit from rising stock prices and higher interest rates—a strategy that has not worked well for the last 20 years. In this paper, we suggest that hoping for funded status to improve via further stock pr...

On December 16, 2015, Barclays announced the sale of Barclays Risk Analytics and Index Solutions (BRAIS) to Bloomberg. The transaction has implications for the Barclays indices but more importantly it established an immovable deadline for many asset managers to find and implement a replacement for B...

We believe your bond allocation is the place for active management. Since the financial crisis, passive flows into equities have accelerated and as of late they seem to have accelerated on the bond side of the equation as well. Buying inexpensive index performance may, on the surface, look like a go...

Managing portfolio duration is a key focus for fixed-income portfolio managers. But active portfolio duration can change even when the portfolio manager does not make a deliberate choice to alter it. Our colleague Bonnie Wongtrakool has pointed out that changes in benchmark composition can cause imp...

On Sunday Italy goes to the polls to decide whether or not to back Prime Minister Matteo Renzi’s constitutional reforms. Many are calling this a watershed moment for Italy, postulating a “No” vote on December 4 will trigger a sequence of events that could lead to an Italian exit from the euro. We th...

We’ll start this note with the newly elected elephant in the room (Donald Trump). Next, we will review the market reaction, the potential rationale behind observed price movements and our own view. Last, we will review our portfolio construction, discuss winners and losers and comment on potential p...

An updated version of Macro Opportunities: A Flexible Approach to Macro Investing was published on June 28,...

In this Q&A, Portfolio Manager Mark Lindbloom and Product Specialist Travis M. Carr discuss Western Asset’s Total Return Unconstrained (TRU) strategy, which since its inception in 2004 has sought to maximize total return within defined risk parameters, free from the constraints imposed by traditiona...

Western Asset’s Global Multi-Sector strategy (GMS) is currently celebrating its 20-Year Anniversary. We sat down with the strategy’s founders, Portfolio Manager Ian Edmonds, Head of London Operations Mike Zelouf and CIO Ken Leech to discuss the evolution of the strategy and how a GMS portfolio is cu...

A longstanding pension client recently asked Western Asset to help them prepare for a Board presentation. This client, alongside many other institutional investors and $1 trillion in mutual funds and exchange-traded funds (ETFs), measures its fixed-income performance against the Bloomberg Barclays U...

Italian bonds have experienced a spectacular rally since the eurozone crisis in late 2011. Despite the changing valuations, Western Asset has remained constructive. Key to our positive thesis was the seminal shift in Italian politics ushered in under Prime Minister Matteo Renzi to break the cycle of...

With aggregate unemployment below 5%, it is commonly asserted that the US is at or close to full employment. The analysis behind such assertions concedes that sharp declines in labor force participation rates are the primary factor allowing unemployment rates to decline during this expansion, but th...

Of late, my vacation itinerary has steered clear of must-see tourist spots. The shift, while perhaps denying me some bragging rights, was prompted by the underwhelming feeling that inevitably sets in after actually visiting one of these iconic places. These sights seem to pale when compared to the v...

A set of conflicting comments by Federal Reserve (Fed) members in the run up to Fed Chair Janet Yellen’s speech this Friday has raised questions about the direction of US monetary policy both through the end of the year and beyond. On the one hand, New York Fed President Bill Dudley said that, in hi...

In 2012 Gordon Stanger, a researcher from the Solomon Islands, went to the trouble of counting how many times Ian Fleming’s fictitious British Spy, James Bond, had been shot at. The number was 4662 times. He went one step further, ascribing a 5% probability of Bond receiving a fatal wound on each oc...

I was recently asked, as part of a panel, to speak to the issue of the flattening yield curve. I pointed out that the yield curve is often known as the “Cassandra” of leading indicators. For those of you who remember your mythology, Cassandra’s fate was always to be right, but never to be believed. ...

At $7.9 trillion in market value, residential and commercial mortgage-backed securities (MBS) comprise over 20% of the US fixed-income universe. By adding significant yield and diversification against other asset classes, residential and commercial MBS play an important role in investors’ overall bo...

In this Q&A, Western Asset Deputy Chief Investment Officer Michael Buchanan and Product Specialist Robert Abad discuss the Western Asset Multi-Asset Credit (MAC) Strategy. Since its inception in 2010, this unconstrained strategy has sought to maximize income and expected total return within a specif...

The basic facts about municipal bonds are well known to investors: Their income is exempt from federal income tax—and some provide income that is exempt from specific state income taxes. They are generally of high quality. Their track record suggests defaults are extremely rare and bondholders remai...

The Australian pension industry is one of the fastest growing holders of retirement assets globally. Between 2005 and 2015 pension assets grew at an annualised rate of 9.2%,1 outpacing the global average by 3.9%, with total system assets projected to exceed $3.5 trillion by 2025. Growth in assets ca...

Unconstrained investing is back in the spotlight. Once embraced by some investors and consultants as a magic bullet against rising US interest rates and as an opportunistic way to access new and growing segments of the global fixed-income universe, this approach is now generating some skepticism due...

In this Q&A, Andrew Belshaw, Head of Investment Management, London, discusses the short-term and long-term impacts that Brexit, the UK’s decision to leave the EU, will have on the UK, the eurozone and global financial...

Since our webcast in early February, the credit rally has been nothing short of remarkable. More specifically, since February 11, 2016, US high-yield and US investment-grade markets have rallied 15.75% and 7.53% (as of July 6, 2016). Our bullish view back in February was based on the belief that co...

The UK has voted to leave the EU, a historic decision that will reshape and continue to send shocks through the market. Andrew Belshaw, Head of Investment Management, London, discusses the political and economic implications, as well as what this means for European bond markets and currencies, and t...

Western Asset’s Portfolio Manager/Research Analyst John Bellows, PhD, summarizes the key points from yesterday’s Federal Open Market Committee (FOMC) meeting: At its June 15 meeting, the FOMC retreated from the hawkish rhetoric that it had used in May. There was no mention in the post-meeting state...

Achieving Returns in Times of Trouble Overlooking the San Gabriel Mountains from his office in Pasadena, California, Western Asset’s Chief Investment Officer (CIO) suggests that the next few months and years are likely to prove a bumpy ride for investors. He shares the bond market’s cautious view of...

While the commercial mortgage-backed securities (CMBS) market has been known to exhibit periods of high volatility, the first few weeks of 2016 were the most volatile since the credit crisis and took many market participants by surprise. As our expectations for economic growth and commercial real es...

Our contention remains that the US and global economy are experiencing slow but stable growth. Central banks are largely supportive and valuations remain attractive for spread product sectors, despite the rebounding spread rally since early February. The three fears that overlapped to collapse risk ...

After plunging sharply during the crisis, the US housing market has largely recovered and stabilized. Existing-home sales have risen to levels not seen since 2009, and home prices are now only 3% off their pre-crisis peak (Exhibit 1). Strength in pending home sales (Exhibit 2) and low primary mortga...

The fact that the UK on 23 June 2016 is embarking on a referendum on its membership of the EU for the second time in just over 40 years is symptomatic of its somewhat schizophrenic relationship with its neighbours. The British, in Churchill’s words, “are with Europe, but not of it,” wanting to be pa...

We all know that Puerto Rico has a severely challenged economy saddled with more than $70 billion of debt. However, the situation is even worse when you include unfunded pension obligations. Those liabilities exceed $40 billion. All combined, the island is encumbered with liabilities that surpass th...

We are now 7 years past the crisis lows and when equity prices began their recovery in March of 2009. Since that moment, investors have persistently feared an equal but opposite reaction in the fixed-income markets in the form of lower bond prices and higher yields. The fact is that since the beginn...

In light of China’s significant influence on today’s financial markets, Western Asset’s Head of Investment Management, Asia (ex-Japan) and Portfolio Manager Desmond Soon shares an update on China. “Crossing the river by feeling the stones (摸着石头过河)” –Deng Xiaoping...

While 14% declines in stock prices since the summer of 2015 have been the headline story in the financial media, conditions in credit markets can be said to have been even more troubled, and the pain there has lasted much longer than that in the equity markets. In fact, credit spreads have risen to ...

What gives? The savage pummeling the credit markets have taken is so out of proportion to other markets, or to the current economic and Federal Reserve (Fed) narrative, that there almost appear to be two parallel realities. The first is that the US economy is in reasonable shape, exhibiting modest g...

The first 2 months of the year have not gone the way the Federal Reserve (Fed) hoped they would. Financial conditions have tightened: US equities have fallen by 6% and corporate bonds have significantly underperformed Treasuries of similar duration (investment-grade bonds by 2.75% and high-yield bon...

The agency mortgage-backed security (MBS) asset class is the largest non-Treasury investment-grade sector of the US bond universe, constituting 28% of the Barclays Aggregate Index. Agency MBS are created when residential mortgage loans that meet agency underwriting guidelines1 are securitized into a...

As the search for higher yielding investments moves increasingly toward illiquid investment opportunities, Anup Agarwal, Head of MBS/ABS and Elliott Neumayer, Western Asset Product Specialist for Asset- and Mortgage-Backed products, discuss opportunities in light of new global banking regulations th...

Every defined-benefit (DB) pension plan aspires to fulfill its obligations to beneficiaries. In order to do that, it needs to achieve and sustain 100% funded status now or at some point in the future. Suffice it to say that achieving or surpassing 100% funded status is an ultimate goal of every pens...

The Federal Reserve (Fed) is widely expected to increase interest rates at its meeting next week. The probability of a December hike as implied by the futures market has moved from below 30% in mid-October to nearly 80% as of December 8. (Exhibit 1) Other parts of financial markets have responded as...

In this Q&A, Western Asset Global Product Specialist Catherine Matthews discusses our Global Total Return strategy. She explains how this investment-grade only, unconstrained strategy aims to generate a competitive positive return, irrespective of the market environment for global...

This mid-quarterly note comes in three parts. First, we discuss this year’s market developments and our positioning. Second, we discuss upcoming Federal Reserve (Fed) policy. Last, we have a brief overview of the interest rate swap...

Investors in global fixed-income markets are currently grappling with a challenging dilemma: how to secure a reasonable level of income from bonds while maintaining the role of bonds as a ballast to equities and a tool for capital preservation. More than 7 years after the onset of the global financ...

Western Asset Portfolio Manager/Research Analyst John Bellows offers his thoughts on the September 17, 2015 Federal Reserve (Fed)...

An updated version of Q&A: Multi-Asset Credit was published August 2016. In this Q&A, Western Asset Portfolio Manager Chris Orndorff and Product Manager Robert Abad discuss the Western Asset Multi-Asset Credit (MAC) Strategy. Since its inception in 2010, this unconstrained strategy has sought to max...

Whether and when the Fed raises the funds rate is a major issue for fixed-income markets, but it is not the main event. The larger issue is the divergence of US and global growth and even more importantly, inflation. The conditions for an interest rate increase that Fed Chair Janet Yellen has laid o...

Just under three years ago, in October 2012, we published a white paper entitled “Northern Rock Five Years On.” This paper examined the changing face of banking since the onset of the global financial crisis (GFC). We focussed on what we referred to as the “four pillars of banking wisdom”—micro-prud...

"Trading is a search problem. Buyers must find sellers, and sellers must find buyers." -Larry Harris, Trading and Exchanges,...

In this Q&A, Western Asset Deputy Chief Investment Officer Michael C. Buchanan offers his perspective on reduced liquidity in fixed-income...

The following is an update of Western Asset’s view on oil moves over the last several months—particularly given the recent downdraft on July 6—as well as our general assessment of the high-yield energy sector. We’ll begin by looking at the NYMEX oil curve at various points in 2015 (Exhibit 1), start...

Recent volatility in the Chinese bourses has led to systemic fears in China and global growth worries. From a 7.5-year peak in mid-June, the Shanghai Composite Index (SHCOMP) has fallen 28% in a matter of weeks. On July 8, 2015 the SHCOMP lost 5.9% in what was dubbed “Black Wednesday,” suggesting th...

In our previous note, we expounded the view that ultimately Greece and its creditors would come to an agreement over the extension of the bailout package as both sides had much to lose. That remains our view, but, clearly, after the events of last weekend, uncertainty has risen, as has the probabili...

The current crisis revolves around the expiration of the Second Economic Adjustment Programme for Greece that was agreed upon between the country and the Troika (the EU/European Central Bank (ECB)/IMF) in March 2012. The programme was to disburse €164.5 billion until the end of 2014 in a series of t...

As we approach a potentially significant crossroads where the divergence in monetary policy paths between the Federal Reserve (Fed) and other major developed market central banks—specifically the European Central Bank (ECB) and Bank of Japan (BoJ)—looks set to increase further over the coming years,...

US GDP data have disappointed yet again. Since mid-March, the Bloomberg consensus forecast for 2015 GDP growth has fallen from 2.8% to 1.9%. It is very likely that the Federal Reserve’s (Fed’s) upcoming forecast, which will be released at the June Federal Open Market Committee meeting, will follow t...

In this Q&A, Western Asset Product Manager Joseph Filicetti offers an in-depth look at our Macro Opportunities strategy: how it has performed over recent years and how it differs from other unconstrained investing...

This paper presents a risk-factor approach to Liability Driven Investing (LDI) and analyzes the sensitivities of both pension liabilities and assets to these factors. LDI allocations are subsequently achieved by matching these asset and liability sensitivities as closely as is practicable. By workin...

In our previous note, we discussed the "Alice in Wonderland” nature of negative interest rates. Indeed, the concept of negative-yield, long-dated German bunds struck us as a potentially unfathomable “rabbit hole.” Since then, we have seen some extraordinary mayhem in the European bond markets. Yield...

An updated version of The Case for Municipal Bonds was published July 2016. The basic facts about municipal bonds are well known to investors: Their income is exempt from federal income tax—and some provide income that is exempt from specific state income taxes. They are generally of high quality. T...

We constantly hear that managers do not outperform their benchmarks. While this may be true in the large-cap equity space, it is decidedly false in fixed-income. The median fixed-income manager has consistently outperformed the benchmark Barclays U.S. Aggregate Bond Index over 3-, 5- and 7-year peri...

In this Q&A, Portfolio Manager Timothy J. Settel provides an overview of managing US bank loan assets, market inefficiencies and current portfolio...

The market’s outlook for Federal Reserve (Fed) hikes in 2015 has shifted dramatically since the beginning of the year. The reasons for the change in sentiment are well known. US inflation remains below levels that would make the Fed “reasonably confident” about the prospects for price stability. Gro...

In this Q&A, Western Asset Global Product Manager Catherine Matthews details our Global Core Full Discretion strategy and explains how it can help position investors to take advantage of compelling opportunities in the current economic environment. ...

The Municipal Desk continues to find value for the crossover investor in municipal credit spread. This note uses the historical relationship between AAA municipal and Treasury rates (the “Relationship”) to interpret current market levels. As of March 18, 2015, the ratios of AAA municipal yields to T...

Liquidity: The degree to which an asset or security can be bought or sold in the market without affecting the asset’s price. Increased regulatory oversight and requirements have greatly reduced the risk of a financial crisis similar to that experienced in 2008. However, an ancillary result of the ne...

For almost 40 years, money market funds have offered a comprehensive solution for cash investors by providing three main benefits—preservation of capital, liquidity and yield—all with a simple structure that has provided ease of use. However, in the years since the financial crisis, regulators have ...

A value investor is charged with being very explicit in analyzing risk. What are our specific expectations for a security, sector, or strategy, and how does that differ from the market price? The bigger the difference, the larger the margin of safety. With macro strategies, valuation will depend on ...

In this Q&A, Portfolio Manager Carl Eichstaedt explains our Core Full Discretion strategy, one of the longest running strategies at the Firm. Carl also details the key aspects of our philosophy and process and the role they play in portfolio...

As the Federal Reserve (Fed) starts the new year, there is one thing conspicuously absent from its communications: quantitative guidance. This is a notable change. In contrast to the date-based guidance of 2011 and 2012 and the threshold-based commitment of 2013 and 2014, the most recent Federal Ope...

In the past month, crude oil prices have fallen rapidly to levels not seen in more than two years, sounding alarm bells among investors. In this paper, we address our view on how the oil market arrived at this position, the dynamics under current and future consideration, and how Western Asset, as l...

Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again. —John Maynard...

In both the US and the rest of the world, public health events such as Ebola, SARS, H1N1 and HIV/AIDS have garnered considerable attention from the media and financial markets. Such public health events can strain healthcare system resources and at times impact investor psychology. While this invest...

Our diversified strategies have performed well in 2014 and we believe they are likely to be appropriate in 2015. Global crosscurrents have cut into spread products even as the economic story-lines remain favorable. Global inflation is shifting downward and the US dollar is gaining, which is producin...

At a pension plan conference not long ago, a plan manager asked, “Why can’t I just forget about de-risking and behave like a long-run investor: maximizing expected total return?” The simple and short answer is that because a defined-benefit (DB) plan makes regular benefit payments, it simply can’t a...

Western Asset’s view has been that spread sectors will continue to generate excess returns even as the Federal Reserve (Fed) begins to raise rates. However, the last few weeks have challenged this view. Following a slightly hawkish tone from the Fed at its September meeting, US corporate and emergin...

Following a wobbly start to the year, emerging market (EM) external sovereign debt has rebounded markedly to outperform most major asset classes. Total return—as measured by the JPMorgan Emerging Market Bond Index Global (EMBIG)—is up approximately 8% for the year through September 26, reversing las...

The global picture remains one of a forward-moving but uninspiring recovery. While the US economic recovery has improved, Europe’s has faltered meaningfully, raising uncertainty in global financial markets. The overhang of geopolitical tensions in Ukraine and the Middle East also clouds the outlook....

Next week Federal Reserve (Fed) Chair Janet Yellen will give the opening speech at the annual conference of central bankers in Jackson Hole, Wyoming. In the past, the Jackson Hole conference has been an opportunity for Fed chairs to argue for adjustments to monetary policy. Alan Greenspan used the 1...

On July 23, 2014, the U.S. Securities and Exchange Commission (SEC) voted 3 to 2 in favor of adopting amendments (proposed in June 2013) to certain rules under the Investment Company Act of 1940 that govern the operation of money market funds (MMFs). MMF reform has been a priority for US regulators ...

The Puerto Rico Public Corporation Debt Enforcement and Recovery Act has roiled the market for Puerto Rico debt and focused investor attention on the Commonwealth’s willingness to meet its debt obligations. Of course, the Act and its continuing effects did not occur in a vacuum; they are the latest ...

Astute investors have a keen appreciation of the risks they face. To better understand the risk/reward tradeoffs being offered today we will examine history to understand the context of past market performance and provide an assessment of the current environment, which we believe provides a compelli...

At the stroke of the midnight hour, when the world sleeps, India will awake to life and freedom. A moment comes, which comes but rarely in history, when we step out from the old to the new, when an age ends, and when the soul of a nation, long suppressed, finds utterance. Jawaharlal Nehru, August 14...

On June 5, the European Central Bank (ECB) acted aggressively to provide more liquidity to the eurozone. Below are notes on the two most important parts of the ECB announcement: negative deposit rates and the new Targeted Longer-Term Refinancing Operation (T-LTRO) program. NEGATIVE DEPOSIT RATES: Th...

Recently, the increased risk in Emerging Markets (EM) has led to questions about what forces are at work and where the opportunities may be going forward. In this Q&A, Portfolio Manager Robert Abad offers insight into what may be influencing the behavior of EM and how this could be built into invest...

A Defined-Benefit (DB) pension plan’s obligations to its beneficiaries are estimated by applying assumed mortality rates to the plan’s census of beneficiaries, both active and retired. As one would guess, the longer beneficiaries can be expected to survive and collect benefits, the larger will be th...

Our thesis that the US and global recovery would prove a very long and drawn out affair persists. The good news is that we are now further from the conditions threatening systemic risk emanating from the financial crisis. The challenging news is that the normalization of economic conditions will sti...

When one door is closed, don’t you know, another is open ~Bob Marley At Western Asset, middle market debt specifically means debt issued primarily by US companies that posted revenues last year of less than $1 billion. These are generally smaller companies than those we see in the high-yield bond ma...

Federal Reserve (Fed) officials determine the appropriate stance of monetary policy based on their outlook for employment and inflation. To some extent their outlook is based on developments in the latest economic data. To a much larger extent, however, their outlook reflects the Fed’s own models, e...

In pension management as in life, simple is usually better. There are all kinds of complex fixed-income strategies a plan can engage in to reduce risk, but our research indicates that these provide little or no advance over simple derisking moves. Our advice is “Don’t sweat the small stuff.” Complex...

The heads of the Senate Banking Committee, Senators Tim Johnson (D., SD) and Mike Crapo (R., ID) have introduced a bipartisan bill, “Housing Finance Reform and Taxpayer Protection Act of 2014” (S. 1217), proposing a framework for housing finance reform. Under this bill, Fannie Mae and Freddie Mac wo...

The start of 2014 will be remembered for heightened emerging market (EM) volatility, fears of a China slowdown and increased tensions between Russia and the West. Despite this volatility, investors now feel more comfortable owning peripheral European debt. Here we provide five key reasons why Wester...

The Federal Reserve (Fed) has recently been experimenting with a new “fixed-rate full-allotment overnight reverse repurchase (ON RRP) facility.” This new facility has the potential to replace the federal funds rate as the primary tool the Fed uses to influence short-term interest rates, and so could...

Bond markets have rallied strongly this year. Fears of accelerating growth combined with the Federal Reserve’s (Fed) commitment to “taper” asset purchases had led to arguably the most consensus bearish sentiment on rates in many years. Instead, however, two months into the year, growth appears to be...

The current crisis in Ukraine can be traced back to last year when the now ousted former President Viktor Yanukovych sparked mass protests by deciding not to sign a trade deal with the EU in favour of a Russian bailout. Ukraine has significant financing needs this year (estimates range from $15 to $...

Next week Federal Reserve (Fed) Chair Janet Yellen will testify in front of Congress on the Fed’s semi-annual monetary policy report. Not only will this be Yellen’s first public appearance as Fed Chairman, it will also be her first set of policy-related remarks since April of last year. While many h...

In this commentary, we offer details of the recent Murray-Ryan budget deal and how it may or may not affect another potential government shutdown, the debt limit, and emergency unemployment insurance, among other factors. Last week Senator Patty Murray and Congressman Paul Ryan announced a small bu...

In advance of this week’s FOMC meetings, we offer our insight regarding the meetings’ economic backdrop, the likelihood and potential impact of tapering, and the Fed leadership transition, among other topics. ...

In this Q&A, Portfolio Manager Mark Lindbloom outlines the investment approach taken by the Total Return Unconstrained (TRU) strategy and its relevance in today’s market environment. The increased opportunity set of fixed-income sectors offers the opportunity for a manager to add alpha while using t...

Our position has generally emphasized overweights to credit and spread products, based on the view that a moderate US and global recovery combined with low inflation will lift these markets while keeping sovereign yields anchored. We expect growth to improve modestly next year, but we think the rece...

Pop quiz: What is the rate of return on fixed-income investments in a year during which interest rates rise? Positive Negative Investors learn “rates up, bonds down” in Fixed-Income 101. Just as most investors know that 1929 was a terrible year for the stock market, they know that 1994 was a terri...

Once a defined-benefit (DB) pension plan has achieved asset duration equal to that of its liabilities, the next step in the LDI, derisking process typically is to address curve risks or spread risks or combinations of these. Matching the duration of assets and liabilities hedges the plan against bro...

Federal Reserve (Fed) Vice Chair Janet Yellen has been nominated by the President to be the next Fed Chairman. Her public mien is gentle and engaging, qualities that will likely expedite her confirmation process and also influence her leadership of the Fed. Things were not always so in Fed land. His...

After extensive consultation with relevant industry participants, fund investors and interested parties, the European Commission (EC) proposed new legislation for money market funds (MMF) on 4 September 2013. It is important to mention that this remains a legislative proposal. The Regulation must pa...

The year 2013 is poised to be the toughest for Asian bonds in some time. Total return, as measured by the HSBC Asian Local Bond Index (ALBI), was down 5.5% in the year to September, representing the steepest drawdown since the Index’s inception in 2000. This is in marked contrast to the consistent g...

Treasury Secretary Jack Lew has said that unless Congress increases the debt limit, Treasury will run out of borrowing authority on October 17. As this deadline draws closer, we have received a number of questions from clients about the potential consequences if Treasury runs out of borrowing author...

The attractive fundamentals of many emerging market (EM) countries—including stronger relative growth, demographics, productivity catch-up and healthy balance sheets—are well known and, we believe, should continue to support EM assets over the longer term. However, the sharp sell-off in EM bonds and...

Investment Management Strategy Analyst John L. Bellows, PhD, discusses the federal government shutdown and its implications for the economy, markets, and the debt ceiling debate. This morning the federal government started a partial shutdown after yesterday’s negotiations failed to produce an agreem...

It is commonly thought yields are going to go higher. But, if this is so, then it is already reflected in market pricing. And if it is already reflected in market pricing, then it will be very difficult to profit from betting on a rising rate environment. The determining issue for fixed-income posit...

In this Q&A, Portfolio Manager Timothy J. Settel discusses how bank loans compare to other fixed-income instruments and why they may offer a compelling investment opportunity. Mr. Settel also explains how Western Asset finds value in this sector by utilizing its deep research team to choose securiti...

Federal Reserve (Fed) Chairman Ben Bernanke’s dovish surprise reaffirms that the Fed is “data-dependent” and that the Fed remains committed to providing accommodation until there is more progress towards its objectives. Over the past few years, Chairman Bernanke has been remarkably consistent on t...

A pension plan’s assets need to achieve a total return that matches or exceeds that of its liabilities. Merely achieving asset returns that fluctuate in line with liability returns—minimizing tracking error—is good, but it will not be enough if assets underperform liabilities over time. Achieving su...

In this Q&A, Head of Credit Michael Buchanan discusses why the global high-yield asset class may be attractive for a diverse range of investors. He also describes Western Asset’s current global high-yield strategy and weightings, its security selection process, and its risk management techniques. ...

From time to time, ideas arise in the financial markets that challenge conventional investment approaches. Today that idea is unconstrained investing. Typically we think of the hedge fund world as being the domain for this type of approach: a pure alpha strategy that adheres to no benchmark and is i...

The US economy continues to exhibit the modest growth and low inflation that we have anticipated for some time. In such an environment, spread sectors should continue to outperform Treasuries and interest rates should largely be range-bound. In the aftermath of the global financial crisis, the enorm...

The recent spike in the volatility of emerging market (EM) debt has undermined investor confidence in the asset class. After a promising start to 2013, valuations of EM USD-denominated sovereign and corporate debt have declined meaningfully on increasing market concern that the US Federal Reserve (F...

After protracted negotiations, the European Union’s finance ministers (ECOFIN) have agreed to a position on taking the recovery and resolution directive (RRD) for European banks forward. Discussions will now start in the European parliament “…with the aim of adopting the directive at first reading b...

Downside risks to GDP growth in China have risen. A target of 7% is achievable for 2013 as a whole, but this will be the slowest pace of expansion since the post-Tiananmen fallout of 3.8% in 1990. Given that 1Q13 GDP growth came in at 7.7% year-over-year (YoY), this would imply a further deceleratio...

In this Q&A, Robert Amodeo, Head of Municipals, discusses Western Asset’s views on the municipal market in light of the recent sell-off and subsequent increase in volatility in the sector. ...

On June 5, 2013, the commissioners of the Securities and Exchange Commission (SEC) voted unanimously in favor of issuing a formal proposal for further regulation of money market mutual funds. A Notice of Proposed Rulemaking that details the proposed changes will be posted on the SEC website and publ...

The investment world is dominated by the notion that equities will provide the highest return over the long term and that bonds should be included in a portfolio to offset some of the risk that comes with equities while providing incremental income. The remainder of the portfolio—typically 10% or le...

The European economy, including both the eurozone and the UK, continues to face major structural challenges that will take several years to resolve. The central issue faced by the majority of European countries is that of high levels of debt (Exhibit 1). The resolution of this debt burden will conti...

Investment Management Strategy Analyst John L. Bellows, PhD, considers a few recent developments out of Washington DC that may be relevant for...

It isn’t enough for an underfunded public pension plan just to achieve its expected return on assets target, it needs to beat that projected return handily. We present here a measure that reveals just how much asset return a plan needs to be able to discharge its pension obligations. This measure is...

The term corporate hybrid covers a range of debt instruments that lie somewhere between senior unsecured debt and equity in a company’s capital structure. Depending on the structure of the hybrid and how a company performs, an investor could end up with a finite maturity coupon paying bond, or a hea...

With the strength of my entire Cabinet, I will implement bold monetary policy, flexible fiscal policy and a growth strategy that encourages private investment, and with these three policy pillars, achieve...

The traditional fixed-income line-up offered by defined contribution (DC) plans may leave participants wanting given today’s low-yielding, financially repressed market environment. Investors in other channels, both institutional and retail, are seeking strategies that provide: 1) higher income 2) be...

Our contention remains that disappointing economic global growth will persist for the foreseeable future. As a result, we believe policymakers will commit even further to efforts designed to attenuate downside or systemic risk outcomes. The persistent undertow of tepid global growth juxtaposed again...

Due to a number of positive economic and political factors, a significant reduction in sovereign risk in many emerging market (EM) countries over the last 15 years has allowed a deep, robust and liquid local government debt market to develop. Thanks to years of increasingly transparent monetary poli...

In this Q&A, Head of Investment Management, Asia (ex-Japan) Chia-Liang Lian discusses changes in the Asian debt market over the past year, growth drivers for 2013, and the Singapore Team’s investment outlook and strategy, research process, and risk control. He also offers an in-depth look at Western...

“The first panacea for a mismanaged nation is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin. But both are the refuge of political and economic opportunists.”~Ernest...

Those of you who have bet on football games understand the concept of the over/under bet. Essentially, the bookmakers (the market) estimate the total number of points likely to be scored in a game. Bettors (investors) can then bet the over if they believe the point total will be higher or the under ...

In this Q&A, John L. Bellows, PhD and Investment Management Strategy Analyst, discusses the sequester, its distribution across government programs, how it may affect the economy, how it is reflected in economic forecasts, and what both the sequester and a possible government shutdown later in March ...

Plans are worthless, but planning is everything ~Dwight D. Eisenhower ...

Our defined-benefit (DB) pension clients have recently shown increased interest in pursuing liability driven investing (LDI) strategies to reduce the tracking error between their plan assets and the valuation of their liabilities. Substantial reduction in tracking error can be achieved by increasing...

In the aftermath of the financial crisis, our investment thesis has been that the global recovery would prove to be enduring but extremely sluggish and that, despite anaemic growth, the risk premium due to systemic risk would slowly recede. Such a recovery would look something like two steps forward...

In the white paper LDI and the Persistence of Tracking Error, we report the results of various hedging exercises involving both simple and complex LDI strategies. We analyze how well these strategies track liability valuations that were derived from using yield curves to discount projected DB benefi...

The global financial crisis has increased the focus of regulators, rating agencies, and shareholders on insurance companies’ enterprise risk management practices. For example, in September, 2012, the National Association of Insurance Commissioners (NAIC) adopted the “Risk Management and Own Risk and...

Most of us have learned the rule of 72 somewhere along the way in our financial careers. Simply stated, divide 72 by your expected annual return and the result will be the approximate time it will take for your investment to double. Historically, the 10% annualized return expectation for equities su...

Though it was neither the largest nor the most spectacular bank collapse of the global financial crisis (GFC), the September 14, 2007 fall of Northern Rock, a mid-sized regional UK bank (the only collapse to provoke a full-blown classic retail bank run) exposed all the faultlines of the GFC disaster...

In this Q&A, Western Asset Portfolio Manager Robert Abad discusses the latest dynamics and trends within emerging markets (EM). Although EM continue to demonstrate resiliency, Mr. Abad believes that given the amount of global uncertainty today, it is important that investors evaluate opportunities a...

A key component of an insurance company’s business is the management of spread risk in its general account investment portfolio. For bearing this risk, rating agencies and regulators establish capital requirements that vary with the level of risk, as measured by credit ratings. For example, in the U...

The insurance industry continues to feel the impact of low interest rates on investment portfolio yields, product design, and reported profitability. Recently, Western Asset has written at length about fixed income sector opportunities to meet investors’ desire for higher yield and income in the cur...

There is a tendency among investors to see two asset classes they think of favorably—emerging markets (EM) and high-yield (HY)—and assume that the combination of the two will look and function like a faster-growth version of the US high-yield (US HY) market. A deeper look at the asset class, however...

2011 was certainly a historic year for investors. In addition to extremely high volatility, the year included an unprecedented downgrade of long-term US government debt, continued record-low yields in the US, the US debt-ceiling crisis, and questions about the future survival of the euro amid the so...

As investors, we know that income is an essential component of total return. Income clearly demonstrates its importance in the fixed-income market, but is also critically important in equities, real estate and currency investing. One of the key issues that investors must confront today is the prospe...

Bond indices have been used for benchmarking investment portfolios in the asset management industry for almost 40 years. While geographical and sector coverage has expanded immensely, the methodology for weighting securities in bond indices until recently has been exclusively based on market capital...

Robert Abad is a Senior Research Analyst at Western Asset Management (WAMCO), a global fixed income management firm based in Pasadena, CA which has over $36 billion invested in emerging markets, including the Western Asset Emerging Markets Debt Portfolio (LWEAX). That fund’s strategy, holdings and p...

As the echoes of the housing bubble are felt across many cities in America, the volume of distressed inventory continues to weigh on home prices. On the one hand, the economics of owning a home are among the most attractive in a generation. On the other hand, home ownership is poised to continue dec...

In a low-rate environment, more high-yield companies are looking to refinance their bonds to a lower coupon level. How can an investor potentially profit from this trend? Western Asset’s Short-Dated High-Yield strategy targets bonds that are more likely to be tendered before their first call date—at...

Moody’s warning on Wednesday, July 13, that the US might lose its AAA rating as a result of the debt ceiling issue has prompted some questions regarding the impact of such a development on emerging markets. We believe that this “noise” has been with us for quite some time. Moreover, major structural...

There has been substantial coverage of the possible default of US Treasuries (UST) in the media and by Wall Street analysts. This discussion is driven by the need for politicians to raise the limit on issuance of US federal debt (e.g., UST). In 1917, the US Congress1 created a law that gave it the a...

In our January 2011 US High-Yield Investment Report, we wrote, “We believe that high-yield managers will differentiate themselves during 2011 through issuer selection.” We expected that volatility would decline, performance disparities between rating and industry categories would be fairly muted, an...

Access to the global markets is of ever-increasing importance. Some investors may be looking to draw on a mix of sectors and asset classes within their own borders while also diversifying globally. Western Asset Management Company’s Global Multi-Sector (GMS) strategy is intended to enable just that....

Emerging markets (EM) have been attracting more investor attention and money flows recently. But investing in this asset class is not a new trend at Western Asset. Emerging markets have been a part of our US Core Full Discretion product since 1993. This Q&A talks about emerging markets at Western As...

Insurance industry regulation and financial reporting are undergoing significant reform. For example, the upcoming European Solvency II regulatory regime embraces a market-consistent approach to the valuation of an insurance company’s balance sheet and capital position. Capital requirements are cali...

As we embark on a new investing year, we are hearing concerns from investors regarding their fixed-income allocations. Conventional wisdom is: a) reduce duration, as interest rates are likely to rise, and b) increase liquidity to protect against systemic risk. While we are not convinced that rates w...

Insurance portfolio management is not simply a question of earning returns on assets. It is also a crucial part of an insurer’s efforts to create value for stakeholders. Consequently, portfolio strategies must incorporate a firm’s liability characteristics as well as regulatory, rating agency and ot...

Much has changed since messengers on bicycles physically delivered Government National Mortgage Association (GNMA) certificates around lower Manhattan on GNMA delivery day. The settlement of mortgage-backed securities (MBS) is now almost completely electronic, yet current market conditions have rece...

A stylized fact in the investment business is that whenever you hear someone say “it’s different this time,” you should be very cautious. Because that’s usually a sign that the speaker thinks that unbreakable rules can be broken—that this time, trees will grow to the skies. So let’s start out by say...

There have been a multitude of news stories over the past few weeks discussing foreclosure moratoria actions taken by several banks in various states across the country. While the news media seems particularly focused on the “robo-signer” issue, other issues relating to the foreclosure process have ...

Capital is pouring into emerging markets. For those who remember the “boom and bust” cycles of the 1980s and 1990s, this is nothing new. However, the catalysts that fostered the gradual build-up and rapid reversal of foreign capital inflows during those periods are markedly different from those driv...

"One thing that is clear is that the structure of the world economy is changing in important ways, with effects that are difficult to predict. The past may no longer be a good guide to the future and relying too much on conventional wisdom—either old or new—may be dangerous.” —Brookings Institution,...

The highly anticipated shift in China’s exchange rate regime was finally announced, although it seemed a statement of intent rather than a roadmap for future policy. While details remain thin, it seems likely that China will re-introduce the crawling peg that existed from July 2005 until July 2008,...

By now, liability-driven investing (LDI) has become a household name among defined-benefit pension (DB) plans worldwide. Major DB global accounting and regulatory reforms occurred some years ago, making DB plans more acutely aware of the short-term volatility in their funded balance, and we have sin...

Some commentators are recommending that investors restrict fixed-income allocations to passive mandates, confining active management to equities or alternatives. In a 2009 white paper,1 “Active Equity and Passive Bonds?”, we pointed out that in order for such an approach to be advisable, information...

Emerging-market debt has outperformed many major asset classes on a risk-adjusted basis over the past 15 years (Exhibit 1). As illustrated by the historical Sharpe Ratios in Exhibit 1, hard currency sovereign debt (represented by the Emerging Markets Bond Index Global, or EMBI Global, and the Emergi...

“The problems of the debtor can only arise if creditors are not choosing to make use of the purchasing power they have obtained.” —John Maynard Keynes, 1941, on global imbalances Global imbalances—large trade deficits in advanced economies offset by large trade surpluses in emerging economies—domina...

Some analysts currently recommend that institutions move to passive-only exposure in fixed-income while maintaining active management in equities. In order for such tactics to be advisable, an investor should have a firm conviction that positive active returns—or alpha—can be reliably obtained in eq...

With the broad stock market down nearly 50% since December 2007, some institutional investors are considering rebalancing their portfolios, shifting fixed-income allocations to equities to re-attain the equity exposure they would normally target (that exposure having declined because of the drop in ...

Insurance portfolio management is not simply a question of earning returns on assets. It is also a crucial part of an insurer’s efforts to create value for stakeholders. Consequently, portfolio strategies must incorporate a firm’s liability characteristics as well as regulatory, rating agency and ot...

The past two years have comprised the worst period on record for the investment-grade credit market in terms of relative return versus U.S. Treasuries. The asset class generated 2,442 basis points (bps) of negative excess return for the two-year period ending January 22, 2009, a beating well beyond ...