skip navigation

Stay up to date on timely topics and market events. Subscribe to our Blog now.

January 13, 2021

Another Paradigm Falls

By Robert O. Abad

Stay up to date on timely topics and market events. Subscribe to our Blog now.

“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. Shockingly, this description now applies to the United States following the stunning mob assault on the US Capitol on January 6, 2021.

As we underscored in that note: “… it would be a mistake to view social risk solely as an emerging markets issue. One only needs to look at the Brexit saga in the UK, the flare-ups in Europe … and the impeachment proceedings currently underway in the US as proof of how social discontent can upend countries no matter how economically sound or politically stable they may appear to be.”

The US insurrection joins the global pandemic and global trade war as the third paradigm-busting development in the last three years. Indeed, each one of these events shattered the order we’ve grown accustomed to, or put differently, they upended our expectations of what’s possible in this day and age. Scholars and commentators will undoubtedly spend a significant amount of time trying to ascertain the specific forces that gave birth to these events and their longer-term ramifications on economies, political order and society. For now, and in the wake of a Democratic sweep of the US presidency and both houses of Congress just a few days ago, the US political picture through the eyes of the world has become muddied with respect to the Trump administration and what lies ahead in the first days of the Biden administration.

US fixed-income markets will undoubtedly focus on anything that might alter near-term prospects for domestic growth and inflation (specifically, the details around fiscal action). From our vantage point, we expect a flurry of politically charged, sensationalist headlines in the coming days as impeachment proceedings progress, law enforcement investigations around the insurrection unearth new details and as we move closer to President-elect Joe Biden’s inauguration on January 20. But as was the case during the early days of the trade war and the Covid pandemic, we expect markets to ultimately maintain their forward-looking stance, supported in large part by market certainty around the Biden administration taking the helm in a few days and the knowledge that the Federal Reserve will maintain its strong commitment to supporting economic and market stability.

This latest development also serves as yet another opportunity for us to push back on the tired narrative that fixed-income has lost its appeal as an investment or utility as a risk management tool simply because “yields are too low.” If we review the historical record, especially over the past three years, active US duration and yield curve management can offer material diversification benefits and ballast in broad investment portfolios during periods of pronounced market volatility. With US political risk spiking against the backdrop of a COVID-19 resurgence, we don’t believe this is the time to be greedy, undisciplined or complacent.

© Western Asset Management Company, LLC 2023. This publication is the property of Western Asset and is intended for the sole use of its clients, consultants, and other intended recipients. It should not be forwarded to any other person. Contents herein should be treated as confidential and proprietary information. This material may not be reproduced or used in any form or medium without express written permission.
Past performance does not predict future returns. This publication is for informational purposes only and reflects the current opinions of Western Asset. Information contained herein is believed to be accurate, but cannot be guaranteed. Opinions represented are not intended as an offer or solicitation with respect to the purchase or sale of any security and are subject to change without notice. Statements in this material should not be considered investment advice. Employees and/or clients of Western Asset may have a position in the securities mentioned. This publication has been prepared without taking into account your objectives, financial situation or needs. Before acting on this information, you should consider its appropriateness having regard to your objectives, financial situation or needs. It is your responsibility to be aware of and observe the applicable laws and regulations of your country of residence.
Western Asset Management Company Distribuidora de Títulos e Valores Mobiliários Limitada is authorized and regulated by Comissão de Valores Mobiliários and Brazilian Central Bank. Western Asset Management Company Pty Ltd ABN 41 117 767 923 is the holder of the Australian Financial Services Licence 303160. Western Asset Management Company Pte. Ltd. Co. Reg. No. 200007692R is a holder of a Capital Markets Services Licence for fund management and regulated by the Monetary Authority of Singapore. Western Asset Management Company Ltd is a registered Financial Instruments Business Operator and regulated by the Financial Services Agency of Japan. Western Asset Management Company Limited is authorised and regulated by the Financial Conduct Authority (“FCA”) (FRN 145930). This communication is intended for distribution to Professional Clients only if deemed to be a financial promotion in the UK as defined by the FCA. This communication may also be intended for certain EEA countries where Western Asset has been granted permission to do so. For the current list of the approved EEA countries please contact Western Asset at +44 (0)20 7422 3000.