"Despite geopolitical tensions and the resultant volatility in energy markets, the global backdrop is supported by policy momentum and stable corporate fundamentals. A protracted conflict risks stagflation; however, economic and political incentives point to near-term de-escalation. In this environment, disciplined active management remains essential as we position portfolios to capitalize on selective opportunities across global credit, EM and structured sectors."
- The Middle East conflict and resultant energy supply shock have spiked market volatility. Longer-term inflation expectations remain anchored for now, but rising near-term inflation expectations have tightened financial conditions via fears of central banks leaning hawkish.
- US growth remains resilient as the region is energy-independent while deregulation, tax refunds and policy support are also supportive.
- Europe and the UK confront potential labor-market headwinds and are highly exposed to volatile energy prices, but fiscal measures in Germany may help to stabilize the outlook.
- In Asia, China's recovery remains policy-driven amid structural challenges, while in Japan, expansionary fiscal policy will likely lead to a steeper curve.
- Credit fundamentals across IG and HY remain strong, with issuance elevated by AI-related capex, M&A activity and refinancing needs.
- Securitized sectors—select parts of MBS, CLOs and CMBS—offer relative value despite pressure in consumer and CRE pockets.
- EM continues to benefit from positive fundamentals while relative value varies between the local, corporate and sovereign markets.
- Investor sentiment has stayed constructive, supported by strong fundamentals and appealing yields despite geopolitical and commodity-driven risks.
OVERVIEW
Geopolitical tensions are the defining feature of the macro outlook with energy supply shocks expected to weigh on near-term growth and inflation. Before these pressures the global economic backdrop was gradually improving as fiscal support, easier financial conditions and moderating inflation were helping to strengthen the 2026 outlook. We believe the drastic shift in central bank policy expectations is somewhat overdone and that longer-term growth and inflation targets are still attainable. In the US, policy tailwinds and deregulation will likely support activity despite signs of softer labor conditions. Europe and the UK are more vulnerable to volatile energy prices and face labor-market challenges but German fiscal expansion may offer some stabilization. China's recovery remains policy-driven while Japan's expansionary fiscal policy will likely lead to a steeper curve there. Credit markets remain supported by strong fundamentals and healthy demand, with issuance elevated by AI-related capex and M&A. Select parts of structured products and emerging markets (EM) also offer attractive relative value. Despite crosscurrents from geopolitics and commodities, investor sentiment remains constructive.
"The global growth outlook improved steadily in early 2026, supported by fiscal stimulus, easing financial conditions, and expectations for continued disinflation. While geopolitical risks have tempered this optimism, the US remains well positioned for continued growth, benefiting from energy independence, strong corporate and consumer balance sheets, sustained large-scale capital investment, and a constructive corporate backdrop."
KEY DRIVERS AND RELATIVE VALUE BY REGION
US
Trend-like growth and disinflation remain in place.
Our 2026 base case calls for trend-like GDP growth, stable to improving labor markets and core inflation falling in the second half of the year (H2). The war in Iran and private credit concerns have shifted the range of potential outcomes. A prolonged conflict could raise energy prices, hurting US growth and inflation, complicating the Federal Reserve's mandate. We plan to add duration as rates rise and selectively add to spread sectors if spreads widen from current tight levels.
EUROPE
The ECB is patient as German fiscal expansion takes hold.
European GDP has demonstrated steady if unspectacular growth in recent quarters and we expect this to continue this year. Geopolitical risks remain with Europe particularly vulnerable to the cost of energy imports, which could undermine consumer spending and corporate margins. The impact of German fiscal expansion will be closely monitored both in terms of growth and inflation, where signs of wage pressure remain a concern. The European Central Bank (ECB) should remain data-dependent.
UK
Energy import costs rising; little room for government stimulus.
The Bank of England stands "ready to act as necessary" due to the Iran conflict. Caution is likely to be expressed into 2Q26 as growth/inflation impact is assessed. The government is abiding by fiscal rules that limit scope to loosen materially. Local elections in May, with Prime Minister Keir Starmer vulnerable to leadership challenges. The UK is exposed to volatile commodity import prices, especially for natural gas.
"Geopolitical tensions and oil market volatility haven't derailed our constructive view on EM, despite monetary policy tilting less accommodative. High real yields, supportive local policy and renewed inflows continue to support performance. Select frontier market sovereigns with IMF backed reforms and selective EM corporates offer compelling carry and diversified alpha opportunities."
WESTERN ASSET SECTOR THEMES
Investment-Grade (IG) Corporate Credit
High-Yield (HY) Corporate Credit
Bank Loans
"The duration and severity of the energy and commodity supply shock will remain a source of market volatility with far reaching implications for downstream sectors and profit margins. While these risks may produce intermittent shocks, they also create market dislocations and opportunities for active managers to selectively position. We continue to focus on resilient sectors and disciplined risk management as conditions evolve"
WESTERN ASSET INDUSTRY THEMES
Auto & Related
Banks
Energy
Glossary
The One Big Beautiful Bill Act of 2025 is a US federal statute passed by the 119th United States Congress containing tax and spending policies that form the core of President Donald Trump's second-term agenda. The bill was signed into law by President Trump on July 4, 2025.
Capital expenditure (capex) refers to investment spending in long-term assets (fixed assets). These expenditures include new buildings, machinery, and other equipment needed for an organization's day-to-day operations. Most companies use capex financing to fund their long-term investments.
Free cash flow (FCF) is the cash a company generates from operations after accounting for the cash outflows required to support and maintain its capital assets.
The European Central Bank (ECB) is the central bank of the European Union countries which have adopted the euro.
The Bank of Japan (BoJ) is the central bank of Japan.
JGBs are the bonds issued by the government of Japan, which is responsible for the interest and principal payments.
The Reserve Bank of Australia (RBA) is Australia's central bank and derives its functions and powers from the Reserve Bank Act 1959.
The Brazilian real (BRL) is the official currency of Brazil.
Collateralized loan obligation (CLO) are structured financial products that pool corporate loans and sell them to investors in different risk categories known as tranches. CLOs allow banks to reduce regulatory capital requirements by selling large portions of their commercial loan portfolios to international markets, reducing the risks associated with lending.
Mortgage-backed securities (MBS) is a type of asset-backed security that is secured by a mortgage or collection of mortgages.
Non-agency mortgage-backed securities (NARMBS) are those issued by private entities and not by federal agencies (Fannie Mae, Freddie Mac and Ginnie Mae); they are also called non-conforming loans.
Commercial mortgage-backed securities (CMBS) is a type of mortgage-backed security that is secured by the loan on a commercial property.
A carry trade is a strategy where you borrow money in a low-interest-rate currency (funding currency) and use it to buy assets in a higher-interest-rate currency (target currency) or higher-yielding assets, aiming to profit from the interest rate difference, known as the "carry".
Duration is a measure of the price sensitivity of a fixed-income security to an interest rate change. It is calculated as the weighted average of the present values for all cash flows and is measured in years.
The Consumer Price Index (CPI) measures the average change in U.S. consumer prices over time in a fixed market basket of goods and services determined by the U.S. Bureau of Labor Statistics.
Gross Domestic Product (GDP) is the total monetary value of all final goods and services produced within a country's borders during a specific time, typically a quarter or year.
An Option-Adjusted Spread (OAS) is a measure of risk that shows credit spreads with adjustments made to neutralize the impact of embedded options. A credit spread is the difference in yield between two different types of fixed income securities with similar maturities.
The global financial crisis (GFC) refers to the period of extreme stress in global financial markets and banking systems between mid 2007 and early 2009.
Exchange Traded Funds (ETF) are a type of investment company which are bought and sold on a securities exchange.
An asset-backed security (ABS) is a financial security backed by a loan, lease or receivables against assets other than real estate and mortgage-backed securities.
A liability management exercise (LME) is an out-of-court corporate strategy where a borrower uses existing financing document flexibility to proactively restructure debt, often by issuing new debt or amending terms, to improve its balance sheet, extend maturity, or gain liquidity, typically working with a select group of creditors, sometimes to the disadvantage of others.
EV/EBITDA equals a company's enterprise value divided by earnings before interest, tax, depreciation, and amortization. It measures the price (in the form of enterprise value) investors pay for the benefit of the company's cash flow (in the form of EBITDA).
Risk Disclosures
© Western Asset Management Company, LLC 2026. The information contained in these materials ("the materials") is intended for the exclusive use of the designated recipient ("the recipient"). This information is proprietary and confidential and may contain commercially sensitive information, and may not be copied, reproduced or republished, in whole or in part, without the prior written consent of Western Asset Management Company ("Western Asset").
Past performance does not predict future returns. These materials should not be deemed to be a prediction or projection of future performance.
These materials are intended for investment professionals including professional clients, eligible counterparties, and qualified investors only.
These materials have been produced for illustrative and informational purposes only. These materials contain Western Asset's opinions and beliefs as of the date designated on the materials; these views are subject to change and may not reflect real-time market developments and investment views.
Third party data may be used throughout the materials, and this data is believed to be accurate to the best of Western Asset's knowledge at the time of publication, but cannot be guaranteed. These materials may also contain strategy or product awards or rankings from independent third parties or industry publications which are based on unbiased quantitative and/or qualitative information determined independently by each third party or publication. In some cases, Western Asset may subscribe to these third party's standard industry services or publications. These standard subscriptions and services are available to all asset managers and do not influence rankings or awards in any way.
Investment strategies or products discussed herein may involve a high degree of risk, including the loss of some or all capital. Investments in any products or strategies described in these materials may be volatile, and investors should have the financial ability and willingness to accept such risks.
Unless otherwise noted, investment performance contained in these materials is reflective of a strategy composite. All other strategy data and information included in these materials reflects a representative portfolio which is an account in the composite that Western Asset believes most closely reflects the current portfolio management style of the strategy. Performance is not a consideration in the selection of the representative portfolio. The characteristics of the representative portfolio shown may differ from other accounts in the composite. Information regarding the representative portfolio and the other accounts in the composite are available upon request.
Statements in these materials should not be considered investment advice. References, either general or specific, to securities and/or issuers in the materials are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendation to purchase or sell such securities. Employees and/or clients of Western Asset may have a position in the securities or issuers mentioned.
These materials are not intended to provide, and should not be relied on for, accounting, legal, tax, investment or other advice. The recipient should consult its own counsel, accountant, investment, tax, and any other advisers for this advice, including economic risks and merits, related to making an investment with Western Asset. The recipient is responsible for observing the applicable laws and regulations of their country of residence.
Founded in 1971, Western Asset Management Company is a global fixed-income investment manager with offices in Pasadena, New York, London, Singapore, Tokyo, Melbourne, São Paulo, Hong Kong, and Zürich. Western Asset is a wholly owned subsidiary of Franklin Resources, Inc. but operates autonomously. Western Asset is comprised of six legal entities across the globe, each with distinct regional registrations: Western Asset Management Company, LLC, a registered Investment Adviser with the Securities and Exchange Commission;Western Asset Management Company Ltda. is regulated by Comissão de Valores Mobiliá Western Asset Management Company Pty Ltd ABN 41 117 767 923 is the holder of the Australian Financial Services License 303160; Western Asset Management Company Pte. Ltd. Co. Reg. No. 200007692R is a holder of a Capital Markets Services License for fund management and regulated by the Monetary Authority of Singapore; Western Asset Management Company Ltd, a registered Financial Instruments Business Operator and regulated by the Financial Services Agency of Japan; and 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.
What are the Risk?
All investments involve risks, including possible loss of principal. Past performance is no guarantee of future results. Please note that an investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.
Fixed-income securities involve interest rate, credit, inflation and reinvestment risks and possible loss of principal. As interest rates rise, the value of fixed income securities falls. Low-rated, high-yield bonds are subject to greater price volatility, illiquidity and possibility of default.
Active management does not ensure gains or protect against market declines.
International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets. Investments in companies in a specific country or region may experience greater volatility than those that are more broadly diversified geographically. The government's participation in the economy is still high and, therefore, investments in China will be subject to larger regulatory risk levels compared to many other countries. There are special risks associated with investments in China, Hong Kong and Taiwan, including less liquidity, expropriation, confiscatory taxation, international trade tensions, nationalization, and exchange control regulations and rapid inflation, all of which can negatively impact the fund. Investments in Taiwan could be adversely affected by its political and economic relationship with China
Commodities and currencies contain heightened risks that include market, political, regulatory, and natural conditions and may not be suitable for all investors.
US Treasuries are direct debt obligations issued and backed by the "full faith and credit" of the US government. The US government guarantees the principal and interest payments on US Treasuries when the securities are held to maturity. Unlike US Treasuries, debt securities issued by the federal agencies and instrumentalities and related investments may or may not be backed by the full faith and credit of the US government. Even when the US government guarantees principal and interest payments on securities, this guarantee does not apply to losses resulting from declines in the market value of these securities.