Market Insights at a Glance
Global growth is slowing amid persistent uncertainty around tariffs, geopolitics and fiscal issues, while inflation continues to move toward central bank targets outside the US. Even as risks remain, fundamentals across most fixed-income sectors appear strong, supporting a constructive outlook. In this environment, we favor a modest overweight to high-quality spread sectors with a focus on opportunities created by further yield curve steepening as conditions evolve.
This summary is intended to aggregate the Firm’s current overall views and present an at-a-glance dashboard.*
*As of 30 Jun 25.
Growth
Convictions
- Global growth is slowing with the pace of deceleration varying by region; tariffs and geopolitical uncertainty are key headwinds.
- In the US, growth is also slowing but recession risk has decreased significantly since earlier this year.
- Europe is seeing some improvement in sentiment with growth expected to pick up by 2026–2027 due to factors like increased defense spending and infrastructure investments.
Rationale
Inflation
Convictions
- Globally, inflation is generally trending toward central bank targets with most developed market (DM) central banks shifting toward more accommodative policy.
- In the US, inflation has been more stubborn with goods prices showing some upward pressure while disinflation in shelter is providing an offset.
- Tariffs are expected to disrupt inflation outlooks over the short term, particularly in goods prices, but disinflationary trends in areas like shelter are helping to mitigate the impact.
Rationale
Rates
Convictions
- Globally, while overall yields are moving lower, Japan stands out with a focus on rate normalization rather than further declines.
- In the US, the direction for yields is downward but the timing and extent of moderation remain uncertain.
- Yield curves have steepened sharply, especially in the US, reflecting slower growth expectations and heightened fiscal concerns.
Rationale
Monetary Policy
Convictions
- Most DM central banks have shifted toward more accommodative policies, cutting rates in response to slowing growth and moderating inflation.
- In the US, the Federal Reserve (Fed) is taking a cautious, wait-and-see approach, with at least one rate cut expected in the fall if data supports it.
- Outside the US, the direction of policy rates is clearer and generally lower, while Japan is focused on normalizing rates from very low levels.
Rationale
Credit Markets
Convictions
- Credit fundamentals remain generally strong, with companies showing balance sheet discipline in a slower growth environment.
- Valuations are on the richer side, with spreads currently tight compared to historical averages.
- Market conditions require careful attention to both fundamentals and valuations due to increased volatility and uncertainty.
Rationale
Geopolitics
Convictions
- Trump administration tariff policies are creating significant uncertainty, impacting global trade and economic growth.
- The EU’s new defense spending and infrastructure plans are expected to boost confidence and economic activity, though their impacts will be gradual.
- While a Ukraine ceasefire deal has the potential to reduce energy costs and boost market confidence, long-term stability remains uncertain.
Rationale
*As of 30 Jun 25
Fixed-Income Outlook: Fixed-Income Perspectives in a Shifting Global Landscape
Western Asset maintains a cautiously constructive outlook as the global macro environment grows increasingly complex. Worldwide growth is slowing and is pressured by persistent geopolitical tensions, tariff uncertainty and deteriorating fiscal positions. The US economy continues to decelerate amid elevated recession risks while Europe may experience a modest rebound supported by increased defense and infrastructure spending. In contrast, China faces ongoing structural challenges. Inflation is broadly moderating toward central bank targets, though US inflation remains stubbornly high in some areas. The Federal Reserve is expected to keep rates steady into the fall, awaiting further signs of labor market or growth weakness, while other DM central banks have already begun easing cycles. Despite these headwinds, investor sentiment has rebounded sharply. Notably, the US yield curve has steepened—driven not by foreign selling, but by a repricing of term premium in response to large Treasury issuances and mounting fiscal concerns.
Western Asset Portfolio Positioning
Given today’s volatility, our investment outlook is one of cautious optimism. We believe that this market unpredictability reinforces the case for careful active management. We currently find the following opportunities attractive:
- We favor high-quality credit, including select European banks, as well as single-B rated bank loans.
- We are overweight structured credit and short-duration assets in the US, where long-term debt supply pressure persists.
- Our attention is tilted toward Europe and emerging markets (EM) given improving fundamentals and attractive valuations.
- While spread sectors remain tight, our view is that current fundamentals support modest overweight exposure.
Fading US Exceptionalism; Rising Concerns for USD-Denominated Assets
As noted in our latest Macro Market Trends, the long-standing dominance of the US dollar and US assets is under increasing scrutiny as global investors reassess exposure. We believe that the reallocation away from USD-denominated assets, while gradual, is intensifying. The recent 10% drop in the value of the US dollar in 1H25 combined with record short positioning reflects this eroding confidence.
“Liberation Day” tariffs introduced since April 2 have kicked up market volatility and weakened investor sentiment toward the US. Despite these fears, we do not see an imminent foreign exodus from US Treasuries (USTs). Rather, our view is that foreign investors appear to be letting shorter-term USTs roll off and then reallocating investments elsewhere.
The rise in US yields is largely driven by domestic factors; however, headlines about de-dollarization are not unfounded. Data supports the view that there is reduced foreign interest for long-end UST issues.
Western Asset believes the US dollar will remain dominant for the foreseeable future, but its unchallenged status could be fading. Active management in fixed-income securities may benefit investors in this market environment. Our current approach includes:
- Rebalancing away from overexposure to US long-duration assets.
- Considering foreign exchange (FX) hedged alternatives and sovereigns in Europe, Asia and Latin America.
- Monitoring fiscal and structural risks that could further erode global trust in US policy and market stability.
Western Asset Investment Themes
| Asset Class | Our View |
|---|---|
| US Treasuries | We maintain a curve steepener trade in the US and in other developed market (DM) economies, favoring shorter maturities in the US. However, we are shifting toward a curve flattener stance in Japan following recent sharp yield curve steepening. |
| Investment-Grade Credit | We maintain a slight overweight to investment-grade corporate bonds, especially those of higher-quality issuers, while closely monitoring for any deterioration in fundamentals. |
| High-Yield Credit | We favor an up-in-quality approach within high-yield, emphasizing higher-rated credits and select single-B rated bank loans for their attractive relative value. |
| Structured Products | We see value in higher-quality structured credit, particularly as spreads remain wider than in corporate credit and as fundamentals improve. |
