New orders for durable goods declined 17.2% in April, following a 16.6% decline in March.
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In this blog post we discuss the dislocations to the emerging market (EM) asset class generated by the coronavirus pandemic and assess the fundamental shift in liquidity for both local currency and hard currency bonds.
The unprecedented closure of large swaths of the US economy related to the COVID-19 pandemic has contributed to an enormous amount of stress on tenants, property owners and lenders alike.
Despite its typically low volatility and high credit quality profile, the European supranational bond market has not been immune from whipsawing market moves seen across all asset classes.
Despite the tremendous challenges states face in combatting COVID-19, we believe they will survive—given the combination of healthy reserves, federal support and robust management tools that should enable even the most troubled states to prevail during this unprecedented pandemic.
Lately, clients have been asking which asset class offers the best return prospects over the next 12-18 months: equity or credit? This is a fair question.
May 19, 2020
ECONOMY
Total housing starts dropped 30.2% in April, with single-family starts down 25.4%. Those plunges were only slightly offset by 4.9% and 1.8% upward revisions to the March estimates for total and single-family starts, respectively.
As the dust settles after the enormous market volatility in March and April, we are all having to reset our expectations for asset class returns.
Retail sales declined 16.4% in April on top of an 8.3% decline in March, for a 23.3% cumulative drop across the two months.
This blog post focuses on our portfolio strategy with respect to Italian sovereign holdings. We begin by providing some background information then assess the current market opportunities.
As we claw out of the rubble from the pandemic, it is increasingly clear that we will not suddenly resume our pre-COVID ways of life.
Italy has been in focus recently for several reasons: the dramatic human impact of the early outbreak of COVID-19, the equally dramatic social and fiscal policy measures taken by its government in response to the economic impairment and, finally, the wild swings in its bond prices.
We empathized with the young John Connor when surveying today’s April payroll jobs data. No, not every job in the economy was lost last month.
At today’s ECB meeting, the Governing Council took several additional measures geared at avoiding or at least limiting a potential credit crunch.
US bank stocks have lost almost half of their value in 2020 due to the negative economic impact of COVID-19 and the resulting hit to shareholder payouts as well as the expected diminished earnings power of banks in a lower interest rate environment going forward.
The Federal Reserve (Fed) did not announce any significant change to its policies at today’s Federal Open Market Committee (FOMC) meeting.
Real gross domestic product (GDP) was reported today as declining at a 4.8% annualized rate. Crazily enough, this sharp decline was right in the middle of an extremely wide range of expectations.
Last month, we discussed how we think depressed inflation for the next 10 years is very unlikely. Here, we check in on inflation rates given the latest data.
The current decline in economic activity suggests that there may be a material uptick in corporate issuer downgrades.
In the not too distant past, long lines at airport checkpoints, miles of roadway traffic jams and packed subway cars and buses were an all-too-common, if frustrating, part of American life.
Over the weekend, OPEC+ finally reached a production cut agreement after Mexico initially held out and caused some nervous moments.
When it rains it pours, as the saying goes. This week’s quarterly release of macroeconomic forecasts by the IMF presents an unequivocally bleak near-term outlook for EM economies.
In recent weeks, emerging markets have had to cope with the dual shocks of coronavirus/COVID-19 containment measures and the breakdown of OPEC+ negotiations.
We think that last week’s economic response package in Europe does not quite go far enough to count as “true” fiscal solidarity, but a limited, jointly financed Recovery Fund can go a long way to overcome the standard criticism of “just another European fudge” while harnessing country-level efforts to provide a broader public good in the form of a European recovery.
Governments and central banks around the world have responded to the economic implications of COVID-19 by rolling out unprecedented monetary and fiscal policy responses.
In mid-March, the Treasury market went through a period of severe illiquidity. As we discussed in our webcast two weeks ago on the Fed’s role, illiquidity in the Treasury market was apparent in a number of ways.
For as long as we can remember, primary markets for European investment-grade securities have never had a standardised process. This has often led to anguish regarding information dissemination on book size, security set ups, obtaining a prospectus, identifying ISINs and other issues. The list is endless.
Similar to other countries, Brazil is bracing for an impact from COVID-19 that could be even worse than what its economy experienced as a result of the 2008 great financial crisis (GFC).
Since the beginning of the year and with the onset of the global coronavirus outbreak, inflation expectations have plummeted.
March 24, 2020
The Fed’s Latest Initiative Is Indeed a Game-Changer … for Different Reasons Than You May Have Heard
ECONOMY
For the last two weeks plus, the Federal Reserve has been feverishly announcing policy initiatives intended to stem panic in the financial markets and in the economy.
During this period of market volatility, investors should recall the quality, diversification and tax-exempt benefits of a municipal allocation.
On March 18, we mapped out our expectations for the Reserve Bank of Australia’s (RBA) announcement that was to occur the following day. We were of the belief that the RBA was “ready to walk the talk” and we (along with the markets) were not left wanting.
With the onset of the COVID-19 crisis the Federal Reserve (Fed) has been swift to introduce a variety of measures to support different areas of the financial markets, including the money market fund (MMF) industry.
Economic and social policy responses to the coronavirus/COVID-19 outbreak have led us to believe that Europe will find itself in a recession soon.
Global banks have not been spared by the COVID-19/coronavirus-induced fears of a global economic recession and a potential repeat of the 2008 global financial crisis. We believe that bank stakeholders have learned from the painful lessons of the past and memories of the great financial crisis (GFC) remain very much alive.
Reserve Bank of Australia (RBA) Governor Philip Lowe released a statement on 16 March outlining the RBA’s intention to purchase Australian Government Bonds in the secondary market.
Aggregate US consumer fundamentals remain strong and stable for the time being, even as the effects and risks of COVID-19 continue to grow rapidly.
This year is off to a tumultuous start to say the least, with volatility increasing in commodity markets. Leaving 2019 there was a semblance of stability creeping in that was welcomed by commodity markets.
Yesterday the Federal Reserve held an unprecedented Sunday meeting to announce a new round of measures to address the current economic emergency.
March 10, 2020
STRATEGY
Western Asset’s Municipal Portfolio Management Team is actively coordinating with the Firm’s coronavirus/COVID-19 task force to assess the spread and magnitude of the virus within the US.
After a somewhat underwhelming G-7 statement promising cooperation but not much more, the Federal Reserve moved quickly (as discussed by my colleague John Bellows) to cut the target range for the fed funds rate by 50 bps in an emergency meeting.
The first two months of 2020 saw outsized moves in both US Treasury (UST) yields and US credit spreads, driven by the coronavirus/COVID-19 outbreak and its significant impact on the global economic growth outlook.
Today the Federal Reserve cut its benchmark interest rate by 50 bps. The FOMC’s accompanying statement said that the committee is “closely monitoring” developments and will “act as appropriate” going forward.
As we closed 2019, market expectations were high that we would finally see a budding global recovery gain more traction following a string of positive developments: a US-China phase one trade deal, the dissipation of a “hard” Brexit scenario, more aggressive easing from both developed and emerging market central banks, and green shoots in a number of non-US markets such as Europe.
As equities continue to sell off and credit spreads widen from historically full valuations, the coronavirus/COVID-19 outbreak and related fears of a longer than anticipated containment period and greater scope of impact remind investors just how important it is to do the work.
Investor attention to the ongoing outbreak of a respiratory disease, first referred to as coronavirus and now as COVID-19, has intensified this week.
February 24, 2020
STRATEGY
The tax-exempt municipal bond market is one of the largest debt sectors in the US, with a credit history of low defaults, compelling diversification benefits and excellent risk-adjusted returns.
After a blockbuster year for holders of US investment-grade (IG) credit (corporate bonds), investors are left staring at tighter spreads and lower all-in yields, scratching their heads wondering where the returns will come from in 2020.
With interest rates hovering around all-time lows in the US, the balance sheet of the average US consumer is generally stronger as lower rates reduce the cost of debt servicing.
In early January, Spain’s parliament approved Pedro Sánchez’s return as Prime Minister, leading a coalition government of his Spanish Socialist Workers’ Party (PSOE) and the left-wing populist Podemos group.
This blog post is an attempt to address the evolving developments emanating from the Wuhan coronavirus in China and its impact on the global economy.
With Western Asset’s outlook for 2020 calling for US growth to remain steady, improving domestic conditions in the eurozone and an acceleration in EM growth, one might expect spread sectors to remain favorable this year.
Trade wars, cross-border tension and populism were all in the forefront in 2019.
Foreign exchange (FX) volatility has drifted lower given the prevailing environment of relative stability, and remains subdued when compared with historic levels. Some market participants have described overall FX volatility as cheap, but we disagree.
In August we wrote that financial markets were overpricing the risk of a ‘no-deal’ Brexit and our view was that such an outcome would be avoided. Within the range of alternative scenarios, our central case was that the UK would leave the EU with a revised deal.
In March 2018, the European Commission released its Action Plan on Sustainable Finance, an ambitious 10-point agenda designed to direct private capital toward the EU’s climate action and sustainability goals.
Are we about to witness a new generation of bond issuance that will take a full century to mature? The concept of a bond that matures in 100 years is challenging for many US investors to comprehend, with perhaps the exception of life insurers.
Notwithstanding a few wobbles, Christine Lagarde managed to navigate her first press conference as ECB President largely unscathed.
The headlines after today’s Fed meeting will surprise no one. The FOMC left rates unchanged, indicated that it views current policy as “appropriate,” and its dots showed no change in rates for at least the next twelve months.
November 26, 2019
ECONOMY
In this two-part blog post, we look at German fiscal policy—what is changing, what needs to change, and by when.
A longstanding theme of emerging markets (EM) investing is premised on supportive secular factors. In the decade prior to the Fed Taper Tantrum of May 2013, EM assets had enjoyed an uninterrupted episode of robust performance. During this period, USD-denominated sovereign debt returned a handsome 9.5% per annum, while local currency government debt posted an eye-popping gain of 11.4% per annum, according to the JPMorgan EMBIG and GBI-EM indices. What was the critical impetus that helped EM debt to assert itself as an asset class?
Civil disobedience turned violent. Government leaders forced to flee. Investors caught off-guard by a wave of social unrest sweeping across a number of countries. Such moments bring to mind the Arab Spring—a transformational time beginning in Tunisia in 2010 and that had long-lasting ramifications on growth, politics and society across much of the Islamic world, including protest, violent power struggles, Sectarianism, collapse of state systems, a second Arab Spring and ongoing conflict.
November 18, 2019
STRATEGY
In today’s low-growth, low-inflation global economy, it has been challenging for retail investors to find income for their portfolios. With approximately 25% of global fixed-income trading with negative yields and US credit spreads nearing cycle lows, traditional bond products no longer offer the yields they once did.
Western Asset has been active in the non-QM market for a number of years and in the past two years alone we have securitized $3.5 billion of loans. We continue to be active in the market, as we add select new originators and purchase more loans with the intent to securitize them.
With more bonds drifting into negative yield territory, are income-generating opportunities going the way of the dinosaur?
The current GDP rebound has been unambiguously underwhelming by historical standards in Brazil. Recent activity data continued to disappoint analysts, including us. Over the course of the past year, we have sequentially revised downward our 2019 GDP growth forecast to 0.8% from 1.9%.
October 09, 2019
ECONOMY
In a two-part blog post, we take a look at German fiscal policy—what is changing, what needs to change, and by when.
It has been well telegraphed that European government bonds are negative-yielding across countries and tenors. In this post we look at the impact of negative-yielding government bonds on corporate bonds, considering both the market dislocations caused as well as the fundamental impacts.
Technology is revolutionizing public finance and the municipal business by reshaping the way fiscal policies and municipal projects are designed and implemented.
September 25, 2019
REGULATORY
Part I of this post addressed five myths and practice challenges for investment advisers. Here in Part II, we continue the discussion and address five more myths.
A dollar funding shortage hit markets last week as a perfect storm of factors combined to expose an insufficient quantity of cash in the system, creating severe upward pressure on overnight funding rates.
September 18, 2019
REGULATORY
At Western Asset, we regularly exchange best practices and industry observations with our clients and colleagues that collectively can help address operational and regulatory challenges in the investment industry. This post highlights a handful of common misconceptions and practice challenges for investment advisers and political contributions they and their staffs make.
September 12, 2019
ECONOMY
Today, the European Central Bank (ECB) adopted a comprehensive package of measures geared at bringing the inflation outlook back in line with its 2% target.
September 03, 2019
ECONOMY
Notwithstanding their undeniable economic linkages, Poland and core eurozone countries, in particular Germany, have experienced meaningfully divergent growth over the last two years.
Many of the recent headlines about leveraged loans have highlighted the 40-week streak of retail fund outflows from the loan asset class, according to Lipper. The outflows have been driven by investors’ views that rates will continue to fall.
August 23, 2019
MARKETS
For investors in money market funds, this environment of higher-than-average interest rate volatility leads to the fundamental questions: how do managers think about rates and how do their views impact their funds’ investors?
UK Prime Minister Boris Johnson recently characterized the chances of a no-deal Brexit as 'vanishingly small' and 'a million-to-one against'. However, betting markets are of a different view.
These are interesting times in bond markets. Around $15 trillion of government bonds worldwide now trade at negative yields and this number keeps growing.
Fixed-income investors face a variety of questions; among them perhaps none is more important than the question of risk and reward.
The expansion phase of the current global credit cycle has been going for 10 years. Many say it’s ending.
Offshore debt issuance by Chinese State-Owned Enterprises (SOEs) has witnessed a phenomenal rise, making it too significant to ignore.
The Hong Kong economy is very externally oriented and open, with foreign trade in goods and services equivalent to around three times its GDP. Therefore, it is important for Hong Kong to maintain a stable exchange rate.
Over the last few years commercial real estate (CRE) collateralized loan obligations (CLOs) have moved from the fringes of the securitization market and now are entering the mainstream.
The Federal Reserve (Fed) cut its benchmark interest rates by 25 bps yesterday and ended its balance sheet reduction two months ahead of schedule. Both moves were widely anticipated.
EUR-denominated debt issued by emerging market (EM) countries/companies is asserting its place in the evolution of the asset class.
Responsible investing, when combined with strong performance, is a powerful way to impact society while meeting investors’ specific goals. It can be a true win-win situation.
A proliferation of debt issuance by myriad financial institutions in China in recent years has led to increased market visibility.
This month the UK government announced its Green Finance Strategy aimed at reducing net greenhouse gas emissions to zero by 2050, a step change from the 2008 Climate Change Act which had set goals to reduce emissions by 80% by 2050.
On the 9th July 2019, the Australian Prudential Regulation Authority (APRA) released its final decision on the form of capital that will make up part of the Total Loss Absorbing Capital (TLAC) for its domestic systemically important banks (D-SIBs), which comprise the four major Australian banks.
Emerging market (EM) corporate bonds have come a long way over the past 15 years—from a handful of investment-grade-rated issuers to a full-blown asset class with approximately $1 trillion of outstanding bonds.
The effect of environmental, social and governance (ESG) factors on investment returns is a perennial, albeit evolving, topic in the investment community.
Girls Who Invest is a non-profit organization dedicated to increasing the number of women in portfolio management and executive leadership in the asset management industry.
In a “package deal” to fill a number of top positions in Europe, European leaders have recommended International Monetary Fund (IMF) Managing Director Christine Lagarde to succeed Mario Draghi as President of the European Central Bank (ECB) in November.
Following Draghi’s “whatever it takes” speech in 2012, the ECB enhanced its toolbox with unconventional policy measures in addition to introducing negative interest rates in 2014.
The Reserve Bank of Australia (RBA) cut rates by 25 bps to 1% at their July meeting. This is not only the record low for the bank, but the first consecutive cut in interest rates in Australia since 2012.
For now, the US has stated that trade talks are “back on track”; it will suspend the 25% tariffs on the remaining $300 billion of imports from China and it agreed to lift US supplier restrictions on Huawei (a focal point in the negotiations).
European credit investors seem increasingly comfortable throwing themselves off the balcony, safe in the knowledge that the ECB’s magic carpet will spare them from harm.
In the evolution of emerging markets (EM) debt, the proliferation of supranational securities denominated in local currencies has been a notable highlight.
June 20, 2019
ECONOMY
The Fed did not cut rates or change its balance sheet policy yesterday, but that hardly mattered. The Fed was dovish in every other way that counts, from the statement to the dots to the press conference.
The secular re-rating of the Indonesian sovereign over the last two decades has been nothing short of spectacular.
Historically, the most senior positions at asset managers have been overwhelmingly dominated by men, who represent approximately 50% of the population, but hold more than 90% of senior roles at “buy-side” firms.
Since the great financial crisis roughly 10 years ago, investors are conditioned to expect the unexpected, but as long-term value investors, we at Western Asset still firmly believe that ultimately, macroeconomic fundamentals prevail and are the key determinant of valuations.
For the better part of the last two years, Western Asset has held a cautious view of the automotive space. While there are positive attributes we can identify, the industry has been under siege for the last 18-24 months.
Western Asset views high-grade emerging market (EM) debt as a “must have” allocation for insurance assets. As an asset class, EM debt is prone to suffering from the problem of perception.
The decline in oil prices has been a catalyst for fueling a surge in debt issuance in the Middle East in recent years. As background, the Arab Spring earlier this decade prompted an increase in government spending by the six-member countries of the Gulf Cooperation Council (GCC), comprising Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates.
Last night, President Trump announced via Twitter that on June 10 the US would impose a 5% tariff (with the potential for further increases) on all goods coming into the US from Mexico until the “illegal migrants” transiting through Mexico into the US are stopped.
The age-old question of whether it’s better to utilize an active or passive investing approach for fixed-income continues to this day.
Over the past 18 months, investors in the US credit markets have faced a variety of dark clouds as they attempt to navigate this new age of headline driven volatility.
Western Asset recently cut our 2019 GDP growth outlook for Brazil to 1.3% from 1.9%. The move came on the back of weaker-than-expected data for 1Q19, and underscores the frustratingly sub-par pace of expansion over the last three years.
Last week the US again increased tariffs on certain Chinese imports. This was the third round of tariffs on Chinese imports in the last 18 months, following announcements in 2018 of 20% tariffs on Chinese washing machines and solar panels, and 10% tariffs on $200 billion of select imports.
May 15, 2019
STRATEGY
Emerging markets debt is a growing and diverse asset class that allows participants to invest in over 70 different countries globally. While this breadth presents investors with opportunities for both diversification and yield enhancement in their portfolios, it also comes with potential credit risk and information asymmetry.
Despite massive monetary easing by developed market central banks since the great recession, inflation has failed to emerge. Falling inflation expectations are now becoming a concern.
About a year and a half ago, investors started to get concerned about the significant growth in BBB rated debt issues, which represent the lowest rung of investment-grade (IG) credit. Today, BBBs comprise nearly 50% of the IG market, which has more than doubled since the financial crisis 10 years ago.
The most recent tariff threats against China have scuttled a trade deal that was to be announced on May 10. President Trump plans to raise tariffs on $200 billion of Chinese imports to 25% from 10% effective this Friday, May 10.
Many investors that initiated due diligence on ESG out of curiosity or in response to stakeholder pressure are now taking steps to invest in a future that is not only wealthier but also healthier and cleaner.
Price growth in the US housing market has decelerated in recent months after facing increased headwinds of reduced affordability and higher mortgage rates throughout the latter part of 2018.
General elections in India officially kicked off on April 11 and will stretch out over six weeks in seven rounds of voting, with results expected to be announced on May 23. All 543 elected Members of Parliament (MPs) will be elected from single-member constituencies using the “first-pass-the-post” electoral system.
Despite recent downward revisions to economic growth forecasts, oil prices have held up well. Why is that?
Broadly, we consider current mortgage loan quality within the Australian banking sector to be at historically high levels, and arrears near cyclical lows. The most recent data includes reporting by the banks, plus Standard & Poor’s RMBS Performance Watch as of December 31, 2018.
In a surprising and possibly precedent-setting decision in January, a ruling was made that Puerto Rico did not have to pay the special revenue bonds issued by its Highways and Transportation Authority.
Much has been said lately about the flatness of the yield curve. Municipal bonds, with their own peculiar yield curve, have also exhibited remarkable flatness in recent months.
This week’s 1Q19 GDP report for China showed that the economy grew 6.4% year-over-year, the same pace as the previous quarter and matching the post-Lehman low in 1Q09. Nonetheless, the outcome surprised on the upside (consensus 6.3%).
The Republic of Indonesia goes to the polls on Wednesday, April 17, to elect a President, Vice President and Members of Parliament. Indonesians based overseas have already voted in droves at foreign voting centers, but on Wednesday 193 million Indonesians will cast their ballots in more than 80,000 polling stations spread across this vast archipelago of 17,000 islands.
Last year, the Fed spent a lot of time and effort arguing that it needed to raise interest rates to get them back to “neutral” levels, to where they were no longer stimulating the economy. While stock market and global growth concerns have put this issue on the back burner, it is sure to resurface again soon.
Herman Cain clearly has President Trump’s confidence, but it’s yet to be seen whether a more skeptical Senate will vote for his confirmation to the Federal Reserve Board (the Fed Board). The prospects for Mr. Cain’s confirmation are in constant flux.
Western Asset firmly believes that a strong risk management culture is fundamental to a successful investment management record. As Benjamin Graham once said, “the essence of investment management is the management of risks, not the management of returns.”
So this is what happens when you leave it to UK Parliament to decide! With the government repeatedly failing to secure a majority for the Brexit deal it agreed to with the EU, on Monday Parliament “took control” of the political agenda to try and find common ground on the way forward.
Discussions about an inverted yield curve—and whether it portends a recession—are back in the spotlight. Of particular interest is the spread between 3-month T-bills and 10-year USTs, as this curve went negative on March 23.
Three storylines dominate today’s financial headlines: slowing global growth, rising debt levels and the extended credit cycle. Perhaps they’ve convinced you that an imminent crisis is lurking around the corner.
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