Western Asset expects US and global growth to decelerate from their cyclically driven highs as we move into 2022. Contributing factors include a sharp reduction in global fiscal stimulus, a reduction in monetary accommodation by key central banks such as the US Federal Reserve (Fed) and the European Central Bank (ECB) and the persistence of secular-related headwinds that include rising global debt burdens, aging demographics and technology displacement. Inflation remains challenging for policymakers, but we expect the impact of supply-chain disruptions to ease meaningfully through the course of next year. While Covid continues to bedevil global populations, we are optimistic that the worst is behind us, which bodes well for the continued recovery of reopening sectors and spread product performance. Here, we provide a summary of the key drivers behind our global outlook and describe where we see value across global fixed-income markets.

KEY DRIVERS
The Big Picture

Global Market Rates: Relative Value by Region

CANADA: Provincial and corporate spreads are expected to remain near current narrow levels as the Canadian economy reopens. While longer-term bond yields may still move higher, we don’t expect the two rate hikes by the BoC that are already priced into the 2022 curve.
US: We expect rates to remain range-bound with the 10-year trading within 1.25% to 1.75%.
UK: We feel that the market has been pricing too fast a degree of monetary policy normalization, but we believe that bond yields will have to increase further over time.
EUROPE: The impact of potential further reduction of asset purchases is counterbalanced by more expansionary fiscal policies in core countries and we don’t see a strong impact on spread levels.
CHINA: We expect rates to remain low with and long-term rates well anchored by targeted tightening and a universal easing approach toward all macroeconomic levers.
JAPAN: We expect higher yields on the long end. The Bank of Japan is likely to keep interest rates very low for a long time with a steepening bias in the yield curve.
AUSTRALIA: We are overweight the high-grade supranational debt sector with a focus on the mid-curve 7- to 10-year bonds. We are mildly underweight semi-government bonds that now look expensive thanks to QE buying.
See Relative Value by Sector section for the Emerging Markets outlook.
US We expect growth in the service sectors to continue to disappoint relative to consensus expectations and that growth in manufacturing and construction sectors will be muted as the recovery there is already complete.
Canada Rate hike expectations have been brought forward despite the mid-year Covid setback. We remain optimistic that GDP growth continues to recover in Q4. While near-term growth and inflation justify some recalibration, we still believe we will get a cautious rate hike cycle by the Bank of Canada (BoC).
Europe Strong growth and domestic fiscal support should keep the economic recovery going deep into 2022. The ECB is likely to gradually phase out its emergency measures, but will continue to strive for a very accommodative policy stance as inflation is likely to recede in early 2022.
UK The UK is currently running into supply constraints that are likely to be temporary and should resolve during the course of Q4. The BoE is likely to raise rates at some point next year.
China While near-term growth challenges will persist in China, we do not expect full-blown economic destabilization. Weaker growth is acceptable to policymakers to achieve their long-term strategic objectives as long as weaker growth does not translate into significant job market weakness or financial instability.
Japan We expect that the Japanese economy will grow 2.5% in 2021 and 3% in 2022, rates that are slightly higher than consensus forecasts. We believe that new Prime Minister, Fumio Kishida, will continue the current expansive and supportive economic policies at least in the short run.
Australia Lockdowns have delayed the recovery, but not derailed it, with Q4 expected to see a strong post-delta recovery; growth forecasts for 2022 have been upgraded as well. The Reserve Bank of Australia (RBA) “has a glass half-full view” on the recovery, but still remains very dovish, focused solely on getting inflation back to target levels of 2% to 3%.

Relative Value by Sector