The Big Picture

Western Asset's latest insights on economic drivers and credit markets for fixed-income investors.

"This quarterly report provides an in-depth analysis of the global economic landscape and its implications for fixed-income. It identifies key economic drivers, monetary policies and market trends across regions, presenting a valuable resource for investors seeking to navigate the complexities of the current financial environment, to help them make informed decisions and identify potential opportunities in the fixed-income market."

Michael Buchanan
Co-Chief Investment Officer
  • In the US, bond yields are likely to remain sensitive to whether growth and inflation are moderating. The expected Fed rate cuts later this year should help push market yields lower.
  • In Europe, more pieces of the disinflationary jigsaw puzzle are falling into place, suggesting that the first rate cut will take place at the ECB June meeting.
  • In the UK, we also see the BoE as close to cutting, with the June meeting seen as most likely.
  • In China, we maintain our view that officials will continue with an accommodative monetary policy stance given a number of economic headwinds.

Global growth has downshifted and inflation rates worldwide are generally receding. Deflationary pressures in China, tightening financial conditions in the US and Europe, and subdued demand for manufacturing and services across a number of countries are easing price pressures globally. These trends, coupled with the major central banks promoting a measured and gradual approach to easing monetary policy, are expected to further dampen economic growth and inflation, which, in turn, should lead to lower developed market (DM) government bond yields and a modestly weaker US dollar. That stated, concerns over monetary policy mis-steps, inflation rates stabilizing above central banks targets, stronger-than-expected growth in the US and increased US Treasury (UST) supply to cover a growing fiscal deficit are all phenomena that may lead to periods of heightened market volatility. Spread sectors such as emerging markets (EM), high-yield, bank loans and select areas of the mortgage-backed securities (MBS) space offer attractive yield, but we acknowledge their vulnerability to unanticipated shifts in macro-related sentiment, geopolitical developments and the ongoing uncertainty over monetary policy rate trajectories.

"All eyes are on the central banks this year. Expectations are for rate cuts in the US, Europe, the UK and Canada, along with continued accommodative policy in China. As an active manager, we see opportunity given the improving macroeconomic environment, and continue to be optimistic that we will find value for investors in fixed-income."

Mark S. Lindbloom
Head of Broad Markets


US: Soft-Landing Still in Sight


US demand is expected to slow as savings rates trend back to pre-Covid levels. Core inflation should move toward Federal Reserve (Fed) target levels, helped by goods and shelter costs moderating. US bond yields remain high relative to pre-pandemic growth and inflation, and are likely to remain sensitive to whether growth and inflation are moderating. The expected Fed cuts should help push yields lower.

EUROPE: All Eyes on June


European Central Bank (ECB) policy has reached a level that ECB policymakers believe will bring inflation to target over their forecast horizon. Further declines in core inflation and softer wage data will build confidence in that pathway. We pared back our exposure in 4Q23 and have recently begun to add a little more duration via 5-year German nominal and 7-year German real yields.

UK: Rate Cuts Are "In Play"


Forward-looking indicators suggest economic activity will remain subdued as the labor market loosens further. We expect the slowing of inflation to continue, falling below 2% during 2Q. Focus should remain on the timing and scale of future Bank of England (BoE) rate cuts. Given our outlook, the market could still be underestimating the rate cuts to come. UK gilts should provide positive returns.

"We continue to see opportunity in high-yield credit, bank loans and collateralized loan obligations due to attractive spreads and strong fundamentals. Our thesis for high-yield is that yield levels are very attractive and we seek to benefit our clients by investing in specific issuers whose credit quality we believe is robust or improving."

Walter Kilcullen
Head of US High Yield


Investment-Grade (IG) Corporate Credit

In the US, underlying corporate fundamentals remain resilient as profit margins and leverage are off local peaks but stabilizing. Spreads are at the tight end of the range and already pricing in a soft landing. As such, they do not offer much cushion against negative surprises.

In Europe, IG corporate fundamentals are holding up relatively well despite a soft growth picture. Spreads continued to contract in 1Q and are slightly tight to historic average levels.

In Australia, fundamentals still remain sound despite the prospect of the economy slowing. We remain overweight credit, particularly short-dated holdings, with a preference for select REITs and utility/infrastructure assets that have regulated resets. We also favor senior unsecured major bank and foreign national champion bank issuance.

High-Yield (HY) Corporate Credit

In the US, HY credit spreads reflect relatively strong fundamentals and technicals. We continue to see opportunity in service-related sectors that are still recovering from the Covid-led recession (i.e., reopening trades including airlines, cruise lines and lodging) and potential rising stars. We are more cautious on consumer products, retailers and home construction.

In Europe, corporate fundamentals are generally okay given recent earnings. We remain selective on the new-issue calendar with a BB/B focus and we remain cautious on certain cyclical sectors (i.e., chemicals, building materials, packaging) and companies with heavy refinancing needs.

Bank Loans

Bank loan spreads are relatively attractive. We see more opportunity in select consumer cyclicals and are more cautious on basic industries and communications. We favor securities with discounts to their call price.

"The firm is also focusing on pockets of opportunity in the auto sector, expecting continued strength in gaming, and maintaining a fundamentally constructive view on telecommunications and media, despite intense competition. Overall, there are pockets of opportunity across all industries, but comprehensive analysis is required to make that determination."

Annabel Rudebeck
Head of Non-US Credit/Portfolio Manager


Key Observations

Auto & Related

  • We maintain a neutral outlook with a slight positive bias
  • Positive factors: UAW strike resolution, healthy labor market, balanced supply/demand


  • Recommend a large overweight for top-quality global banks due to resilient performance
  • Banks have lower risk profiles due to stringent regulations, heightened oversight and improved risk management post-GFC


  • We view the sector as a carry trade with the potential for total return
  • Oil demand softening in line with slower global growth; however, OPEC+ supply cuts and elevated geopolitical risks should buoy prices


Economic Outlooks: Scenarios Meet Solutions

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