This week we explore the latest infrastructure developments following the release of President Biden’s $2.3 trillion American Jobs Plan.
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February foreign trade data released today by the Census Bureau show merchandise exports down, imports up and the trade deficit up commensurately.
This week we touch on the potential return of tax-exempt advance refunding and how that could shape tax-exempt and taxable muni market technicals.
Private-sector payrolls rose a very strong 780,000 in March, on top of a +121,000 revision to the February estimate.
This week we explore the restrictions placed on the massive stimulus package that could shape the scope of local fiscal policy in the near term.
In this post, we explore continuing shifts in Asia supply chains in the later stages of the COVID-19 pandemic.
March 23, 2021
ECONOMY
New-home sales dropped by 18.2% in February to an annualized rate of 775,000 units per year.
We believe tax revenues received from sports gambling should help support states’ minor budget issues and target select education and infrastructure programs. However, the tax revenues should not be considered a panacea for states’ larger, structural challenges.
A lot has changed since the last time the Fed published its economic forecasts. Last December Covid infections were rising quickly, causing a renewed set of restrictions on mobility and activity, and the prospect of a divided US government weighed on expectations for fiscal policy and future growth.
Headline retail sales declined -3.0% in February, though that drop was offset somewhat by a huge, +1.9% upward revision to the January sales estimate.
US municipal yields moved lower despite rising Treasuries. AAA municipal yields moved 5-11 bps lower across the curve.
Once again prime and tax-exempt money market funds (MMFs) have fallen under regulatory scrutiny following a market crisis.
March 11, 2021
ECONOMY
At today’s meeting, the European Central Bank’s (ECB) Governing Council (GC) surprised markets by including an explicit commitment to a “significantly higher pace” of purchases under the Pandemic Emergency Purchase Programme (PEPP) over the next quarter. This decision was taken unanimously.
The recent surge in national home prices has some market participants questioning the possible formation of a housing bubble in residential real estate.
US municipal yields moved lower across the curve, despite the Treasury selloff. AAA municipal yields moved 4-8 bps lower across the curve.
Two key student loan proposals are front and center in the new Biden administration and have gained momentum in light of the COVID-19 pandemic. They involve student loan forgiveness and expansion of the payment forbearance program.
March 05, 2021
ECONOMY
Headline private-sector jobs rose by an apparently strong 465,000 in February, but there were so many undercurrents within the data that this is misleading.
We believe the current fervor around rising rates and inflation in the US seems extraordinarily optimistic at this point.
The financial world is experiencing some unique and unprecedented circumstances. We are confronting a pandemic that took the US by surprise and has caused tremendous human and economic hardship.
US municipal yields moved higher across the curve. Municipal fund flows decelerated but remained positive.
Durable goods order rose a strong 3.4% in January, and even excluding volatile transportation equipment, “core” durables orders were up a nice 1.4%, with both series also seeing substantial revisions to the previously announced December data.
US municipal yields moved higher across the curve last week. Municipal fund inflows continued despite the market weakness.
Nowhere in previous publications have we made the claim that positive alpha is easy to generate. Investment managers, however, have shown results over time that reflect the benefits of an active approach to high-yield investing.
So much for fears that the US consumer is foundering. Retail sales rocketed higher in January, with headline sales up 5.3% from December, and so-called control sales measures up 6.0% to 6.2%.
Municipal yields grinded lower, outperforming Treasuries over the week. Municipal mutual funds recorded a 14th consecutive week of inflows.
February 09, 2021
MARKETS
Municipal yields moved modestly higher. Municipal mutual funds recorded a 13th consecutive week of inflows.
Private-sector payrolls rose by only 6,000 in January. Further losses in shutdown sectors such as restaurants and entertainment were accompanied by slight declines in construction and manufacturing and only slight gains elsewhere.
Municipals rallied and outperformed Treasuries during the week. Municipal mutual funds recorded a 12th consecutive week of inflows.
With corporate credit spreads moving closer to trading through pre-Covid crisis lows, many clients are looking for insight on potential market vulnerabilities.
Real GDP rose at a 4.0% annualized rate in 4Q20. This is somewhat below consensus expectations that were clustered in the high-4% to low-5% range.
Municipals rallied and outperformed Treasuries during the week. Municipal mutual funds recorded an 11th consecutive week of inflows.
Drawing parallels between dining and investing, there are some interesting observations when juxtaposing the transformation of dim sum with the development of emerging markets (EM) investing.
Total housing starts rose a strong 5.8% in December to a rate of 1.669 million per year, with November’s level revised upward by a bit more than 2%.
Municipal yields moved modestly higher across the curve, underperforming Treasuries. Municipal mutual funds recorded a tenth consecutive week of inflows.
In our analysis of potential election outcomes last fall, we outlined how a second Trump term would continue to challenge ESG-oriented investors and companies, and how a Biden victory would result in a more supportive environment, subject to the ideological balance within Congress.
January 15, 2021
ECONOMY
Headline retail sales decreased by 0.7% in December, with the November sales total revised downward by 0.3%.
“Civil disobedience turned violent. Government leaders forced to flee.” These were the words we used to describe the tumult taking place in Chile and Hong Kong in a 2019 blog post titled, Don’t Underestimate the Cost of Social Risk.
Municipal yields moved higher across the curve, but outperformed the heavy Treasury selloff during the week. Municipal mutual funds recorded a ninth consecutive week of inflows.
In our recent client travels (virtual, of course!), Western Asset has noted that our insurance investor base is increasingly viewing emerging markets (EM) debt as an attractive opportunity in a post-pandemic, reflationary environment.
The year 2020 will long be remembered for the COVID-19 pandemic and extraordinary levels of both geopolitical uncertainty and volatility in markets.
Private-sector employment declined by -93,000 in December, as job losses at sectors hit by newly re-imposed Covid-related shutdowns more than offset sizable gains elsewhere.
Municipal yields were unchanged during the quiet holiday-shortened week. Fund flows remained positive while new-issue supply was virtually non-existent during the last two weeks of 2020.
Since our last update in June, recent trade talks between the UK and EU have followed several plot twists and moments of suspense worthy of a festive blockbuster movie.
Data released today showed a 0.4% decline in consumer spending, a 1.1% decline in personal income and an 11.0% decline in new-home sales, all for November.
Municipal yields moved slightly higher in intermediate and long maturities, but outperformed Treasuries. Fund flows remained positive and supply was elevated as issuers took advantage of the year’s last full week of trading.
In our blog that was published in February, Thoughts on Spain’s New Coalition we shared our belief that the coalition government led by Pedro Sánchez was likely to prove longer-lasting than many had believed at first.
Recent vaccine breakthroughs have injected some sunshine into the ongoing devastation of the COVID-19 storm. Though the fight against surging coronavirus infections goes on, the upcoming vaccines should provide a bridge back to more regular daily life for many people over the coming year.
The Federal Open Market Committee (FOMC) found itself in a tricky spot at today’s meeting. On the one hand, current economic conditions have deteriorated since the Committee last met six weeks ago.
Total retail sales declined 1.1% in November from an October level that was revised lower by 0.2%.
Municipal yields moved lower across the curve, but underperformed Treasuries. Municipal technicals remained favorable as positive fund flows continued. A record issuance year was driven by heightened taxable supply.
At today’s meeting, the European Central Bank’s Governing Council introduced a significant recalibration of its instruments, including a nine-month extension of the Pandemic Emergency Purchase Programme, to March 2022, and a continuation of bank financing at ultra-low rates through 2021.
Municipal yields were generally unchanged during the week. Municipal supply remained elevated. AAA municipal yields were mostly unchanged, moving 1 bp higher in short maturities, and 1 bp lower in intermediate maturities.
Private-sector payrolls rose by 344,000 jobs in November, with a slight +9,000 revision to the October estimate. This gain was above the 307,000 gain suggested by ADP Wednesday.
Municipal yields were generally unchanged during the week. Technicals remained strong amid positive demand and limited new-issue volume.
New orders for durable goods rose 1.3% in October, on top of a slight 0.1% upward revision to September.
Municipals rallied across the yield curve and outperformed Treasuries. Strong demand for tax-exempt municipal debt persists.
The latest COVID-19 vaccine trial results have been the most promising by far, but the enormous macro challenges going into 2021 must not be downplayed.
Financial markets have wobbled in recent months alongside the chances for another anti-Covid stimulus package from the federal government. While the negotiations in Washington make for good political theater, our analysis indicates that further stimulus is not needed by American households.
Municipals yields were relatively unchanged, outperforming Treasuries. Strengthening technicals supported high-yield municipal outperformance.
Total retail sales rose 0.3% in October, on top of a +0.5% revision to the September level, in data released this morning by the Census Bureau.
With US elections largely in the rearview mirror, global markets must once again face down the ongoing COVID-19 pandemic.
As of this writing, it looks like the election dust storm is clearing and that Joe Biden has been elected the 46th President of the United States. Republicans appear to have retained control of the Senate, subject to the final election results in Georgia and North Carolina.
Municipals outperformed Treasuries, as Muni/Treasury ratios declined below 100% over the week. AAA municipal yields moved 3 to 15 bps lower across the curve.
Private-sector payrolls rose by 906,000 jobs in October, above expectations and hugely above the 365,000 gain projected by the ADP survey.
The monthly municipal supply just made a new record. AAA municipal yield changes were mixed as the yield curve flattened.
At today’s meeting, the European Central Bank’s (ECB) Governing Council (GC) left all major policy levers unchanged but pre-announced changes that will be rolled out at the next meeting.
Real GDP grew at a 33.1% annualized rate in 3Q20. Context is everything, so let’s recount the various perspectives of this number.
Over the past few years, the US health care legislative agenda has been focused on lowering overall health care costs by improving price transparency and reducing the cost of high-priced prescription drugs.
Municipal yields moved higher as Treasuries retreated. AAA municipal yields increased 2 bps across intermediate and long maturities, trailing Treasuries higher.
There has been a lot of discussion about whether US Treasury bonds will continue to function as a diversifier or hedge for portfolio risk.
October 21, 2020
MARKETS
The two presidential candidates highlight opposing views with regard to the oil and gas sector; one supports the industry and the other is looking to accelerate the transition to cleaner energy alternatives.
Single-family housing starts rose a rousing 8.5% in September on top of a +1.7% revision to the August level, which now shows a 2.9% gain.
Municipals posted positive returns as yields trailed Treasuries lower. AAA municipal yields declined 1 bp across the curve, trailing Treasuries.
Health care remains a key topic heading into the presidential election, and the pandemic has drawn increasing attention to the gaps in our health care system regarding private insurance, government programs and varying levels of coverage. In this blog post we examine the potential changes to US health care coverage following the election.
Retail sales rose 1.9% in September, extending a string of strong gains. In the five months since their shutdown-induced April low, retail sales have risen 33.1% and now stand 4.2% above pre-shutdown levels.
ESG assets have grown significantly, with US sustainable investments totaling $12 trillion at the end of 2018. This acceleration in ESG investing has not gone unnoticed by federal agencies, given the intersection between ESG, investment regulations and climate policy.
Our constructive secular view on major US banks is based on the following: (1) simpler, safer and stronger banks; (2) well-entrenched, lower-risk banking business models, and (3) a robust regulatory framework driven by Dodd-Frank in 2010.
Municipals posted negative returns as yields moved higher in sympathy with Treasuries. AAA municipal yields increased approximately 3-10 bps across the curve, following Treasuries higher.
Infrastructure spending persists as a popular election issue, often viewed as an ideal solution to drive growth and visions of the future against a backdrop of aging roads, bridges and outdated utility systems.
The US president holds a larger sway over international affairs than over domestic policy, which is often dominated by Congress. This simple fact is yet another reason that the upcoming election will be a crucial milestone.
By most accounts, the macro shock emanating from the effects of COVID-19 has been profoundly acute across EM countries. During Q2, real GDP in non-China EM shrank at a staggering rate of 40% QoQ annualized.
October 06, 2020
ECONOMY
The US deficit on real merchandise trade widened slightly in August. Real exports rose 2.3%, compared to a 2.1% increase in real imports.
Municipals posted negative returns during the week but generally outperformed Treasuries. AAA municipal yields moved 2-5 bps higher across the curve.
The 2020 pre-election rollercoaster ride is not over by any stretch of the imagination. Markets have been buffeted once again by another black swan event—this time, the breaking news that President Trump has tested positive for COVID-19.
October 02, 2020
ECONOMY
Private-sector payrolls gained 877,000 jobs in September, with a +40,000 revision to the August employment estimate. Press coverage this morning appears to be focusing on the 661,000 gain in total payroll jobs, which is said to have been below expectations.
The Reserve Bank of Australia (RBA) continues to believe that fiscal support will be the main driver of the Australian economy in the medium term and we agree. But, at the same time, the central bank hasn’t stopped looking for ways to assist wherever possible.
AAA Municipal yields were generally unchanged during the week. Muni technicals softened as intermediate- and long-term fund categories recorded outflows.
Sales of new single-family homes rose another 4.8% in August, on top of 14.7%, 20.5% and 22.5% gains over the previous three months. In other words, new-home sales in August were 77.4% above the April low.
Almost exactly six months ago, air travel as the public knew it changed forever due to the outbreak of COVID-19. The unprecedented closing of international borders, as well as quarantines and other “shelter-in-place” restrictions, caused global air travel demand to decline more than 90% at its nadir in April 2020.
AAA Municipal yields were generally unchanged during the week. Muni technicals softened as inflows lowed amid an elevated new issue calendar.
As we enter autumn with COVID-19 rates falling from their “summer surge,” the reopening process resuming, and amid mounting concerns about another spike in cases as the weather cools, we’re looking closely at the pandemic’s impact on commercial real estate and retail space specifically.
The context for today’s Federal Open Market Committee (FOMC) meeting had a number of crosscurrents. On the one hand, the US economy has handily outperformed consensus expectations over the last few months.
Retail sales rose 0.6% in August, with that gain offset only partially by a -0.3% revision to July’s level. Sales excluding cars, gasoline and building materials (our “control” sales measure) also rose 0.6% in August, with a similar downward revision to July.
Many investors may be wondering whether there is any value left in domestic fixed-income markets. While outright yields may look tight on a historical basis, we contend that spread sectors still provide attractive risk-adjusted returns relative to cash and government bonds.
AAA Municipal yields were mixed across the curve, underperforming Treasuries, as index returns grinded higher. The Senate failed to advance through Congress its stimulus bill, which provided limited support for municipalities.
September 10, 2020
ECONOMY
In today’s meeting, the European Central Bank’s (ECB) Governing Council (GC) left all major policy levers unchanged and reaffirmed its commitment to ample monetary stimulus.
Headlines seem to be popping up about corporate America choking on debt, fiscal and monetary support that creates zombie companies, and questioning why companies aren’t cutting debt in a downturn.
AAA Municipal yields moved 1-2 bps higher across the curve. The Bloomberg Barclays Municipal Index returned
The Bureau of Labor Statistics reported today that private-sector payroll jobs rose by 1,027,000 in August, with a slight upward revision to the July jobs estimate.
Following up on our blog post about the long-term structural drivers of our inflation view, this post explores some of the shorter-term impacts to inflation due to the Covid crisis.
Around 15 years ago, early adopters of liability driven investing (LDI) began reducing long-held duration underweights (vis-à-vis the liabilities). Initially, this was done using off-the-shelf long duration indices like the Bloomberg Barclays Long Government/Credit or Long Credit indices.
AAA Municipal yields moved 3-10 bps higher across the curve, trailing USTs. The Bloomberg Barclays Municipal Index returned -0.33%, while the HY Muni Index returned -0.39%..
When evaluating a money market fund, investors tend to look at characteristics that help them judge the attractiveness of a fund (e.g., cut-off time, yields and returns), including risk (e.g., weighted average maturity and life) and even the liquidity (e.g., size of the fund), but one factor often overlooked is the Net Asset Value per share, or NAV.
The Census Bureau this morning released estimates of July activity in durable goods manufacturing. These estimates indicated that the sector continued to recover from the COVID shutdown in July.
AAA municipal yields moved 7-10 bps higher during the week, underperforming USTs. The Bloomberg Barclays Municipal Index returned -0.31%, while the HY Muni Index returned -0.11%.
AAA municipal yields moved 7-9 bps higher across the curve during the week. Municipal/Treasury ratios declined below 100% across the curve for the first time since March volatility.
The Census Bureau reported today that housing starts rose 22.6% in July, while the June figure was revised upward by 2.9% to show a 17.5% increase on top of an 11.1% increase in May.
Headline retail sales rose 1.2% in July, with the estimate for June revised up by 1.0%. So-called “control” sales—excluding car dealers, service stations, building material stores, and restaurants—rose 1.4%, also with a 1% upward revision to June.
August 11, 2020
MARKETS
AAA municipal yields moved 7-10 basis points lower during the week, outperforming Treasuries and leading the Municipal/Treasury ratios lower to 69%-103% across the yield curve.
Just as businesses and consumers have moved to shore up cash holdings (liquidity) in the last few months, so too the Treasury has built up massive amounts of cash holdings—more than $1.5 trillion worth of accumulation.
Payroll jobs rose by 1.763 million in July, with private-sector jobs up 1.462 million.
AAA municipal yields moved 6 bps lower across the curve, trailing Treasuries. Municipal mutual funds recorded a twelfth consecutive week of inflows, turning net flows positive for the year.
As we wrote about recently regarding pandemic-driven changes to the office sector, the hospitality sector overall, and hotels specifically, must also adapt to the new environment or risk extinction.
July 30, 2020
ECONOMY
Real GDP contracted at a -32.9% annualized rate in 2Q2020, far and away the largest quarterly decline on record for the US.
The Federal Reserve (Fed) changed very little in its official statement following today’s Federal Open Market Committee meeting.
AAA municipal yields moved 2-4 bps lower during the week, with longer-dated muni bonds underperforming Treasuries. The Bloomberg Barclays Municipal Index returned 0.44%, while the HY Muni Index returned 0.84%.
July 24, 2020
ECONOMY
New-home sales rose 13.8% in June, with a positive revision to May’s level.
July 21, 2020
MARKETS
AAA municipal yields moved 6-7 bps lower during the week, outperforming Treasuries and driving municipal-to-Treasury ratios lower.
Retail sales continued to increase strongly in June, furthering their recovery from the COVID-induced shutdown that debilitated activity through April.
AAA municipal yields moved 3-10 bps lower during the week, outperforming Treasuries and driving municipal-to-Treasury ratios lower. The Bloomberg Barclays Municipal Index returned 0.50%, while the high-yield muni index returned 0.84%.
As markets are currently coping with conflicting headlines of buoyant markets, viral outbreaks and a choppy economic restart, the Western Asset Coronavirus Task Force wanted to share our take on the resurgent growth of COVID-19 in the US as well as the outlook for emerging markets (EM).
AAA municipal yields were generally unchanged during the quiet, holiday-shortened week, and outperformed Treasuries, which moved higher in intermediate and long maturities.
Ever since the Federal Reserve broached the subject of average inflation targeting and price level targeting in early 2019, the market has been waiting for some guidance on what it all means for monetary policy.
Total payrolls rose by 4.800 million in June, with the May estimate revised upward by 90,000.
AAA municipal yields were generally unchanged during the week, as an elevated supply calendar paired with uncertainty around the implications of rising COVID-19 infections kept munis from keeping pace with the Treasury rate rally.
In the past three months, we have seen extraordinary policy initiatives from both the Federal Reserve (Fed) and the federal government (feds), so much so that in a post here a few weeks ago, we argued that policy had already done as much as it could do and should cease further stimulative activity. In many folks’ minds, the Fed has already done too much, and they believe a bout of substantially higher inflation is coming to the US.
Consumer spending registered some nice gains in May, following two months of cataclysmic declines.
Rating actions have come fast and furious over the past few months.
Municipal market yields moved modestly higher amid heavy new-issue volume.
Municipal market returns grinded higher last week, supported by strong flows into municipal mutual funds and seasonally high coupon and principal reinvestment which offset an elevated calendar. This week we take a deeper dive into jobs data associated with COVID-19 economic impacts to assess varying degrees of austerity at the state and local levels.
Retail sales registered a 17.7% gain in May, with April’s sales revised up by 2.1% from the level announced a month ago. We focus on a “control” sales measure that excludes sales at vehicle dealers, service stations and building material stores.
June was already shaping up to be an interesting month for UK markets given the latest round of trade talks between the UK and EU, and the upcoming July 1 deadline to agree on an extension to the “transition period”.
The Consumer Price Index (CPI) declined 0.1% in May, with the core CPI declining by the same amount. These slight declines were a moderation from the sharper declines seen in March and April, when the COVID-induced economic shutdown was first taking effect. We have seen an apparent bottoming of economic activity in May, and the CPI news is in line with that.
Welcome to the inaugural edition of the weekly Western Asset Municipal Monitor. Given the recent market volatility and ever-changing market conditions, we hope this new publication will provide muni investors with relevant and useful content.
June 08, 2020
ECONOMY
This blog post features a series of charts with brief commentaries to describe each graphic; in total we think the charts present a comprehensive update regarding the economic progress North Asia is making on the road to a rebound after suffering the economic effects of the COVID-19 lockdowns/social distancing.
Well, that was a nice surprise! Financial markets were bracing themselves for another 8 million jobs lost in May.
In today’s meeting, the European Central Bank’s (ECB) Governing Council resolved to further expand its monetary accommodation by enlarging the Pandemic Emergency Purchase Programme (PEPP) by €600 billion, lengthening its duration by six months to at least the end of June 2021, and committing not to reverse the effect of those PEPP purchases until at least end-2022.
We argue here that the Federal Reserve (Fed) and federal government (feds) have already done as much as they can do to assuage the effects of the COVID-19 economic shutdown.
New orders for durable goods declined 17.2% in April, following a 16.6% decline in March.
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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