Western Asset Core Plus Bond Fund Class R · NASDAQ:WAPRX
Western Asset Core Plus Bond Fund Class R — Western Asset — Corporate Update (September 2019)
38 slides from Western Asset Core Plus Bond Fund Class R's corporate update, Sep 26, 2019
Slide 1: Thank you for joining Western Asset's 4Q Market and Strategy Update
Biographies Thank you for joining Western Asset’s 4Q Market and Strategy Update webcast featuring CIO Ken Leech. The presentation will begin shortly. Western Asset Blog Delivering timely research and Follow us on social media! analysis every week blog.westernasset.com 11
Slide 2: 4Q19 Market and Strategy Update
4Q19 Market and Strategy Update September 26, 2019 Ken Leech Chief Investment Officer 2
Slide 3: Global Outlook
Global Outlook Western Asset long-term themes Global growth ongoing but slow by historical standards Global inflation will require extraordinary monetary policy accommodation to normalize Current themes Global growth will prove to be resilient Monetary policy will pivot to greater accommodat
Slide 4: "Reflation Trade" vs. "Secular Stagnation"
“Reflation Trade” vs. “Secular Stagnation” Global growth has downshifted and inflation remains subdued. Developed Markets Real GDP Growth Developed Markets Inflation 5 18 4 16 14 3 12 2 10 Percent 1 Percent 8 0 6 -1 4 -2 2 -3 0 -4 -2 2001 2004 2007 2010 2013 2016 2019 2022 1970 1975 1980 1985 1990 1
Slide 5: Global Headwinds: Debt and Demographics
Global Headwinds: Debt and Demographics Dependency Ratios Non-Financial Debt 2050 Forecast 2020 Forecast 2000 400 China US Japan Eurozone Japan 350 300 European Union Percent of GDP 250 200 United States 150 100 China 50 1995 2000 2005 2010 2015 0 20 40 60 80 100 120 Source: Bank for International S
Slide 6: Growth Rates Have Not Re-Converged
Growth Rates Have Not Re-Converged J.P. Morgan Forecast Revision Index US China Euro Area Rest of World 2.5 2.0 Cumulative Percent Revision to Rolling Forecast 1.5 1.0 0.5 0.0 -0.5 -1.0 -1.5 2017 2018 2019 Source: J.P. Morgan, As of 20 Sep 19 6
Slide 7: Global Manufacturing and Services Have Diverged
Global Manufacturing and Services Have Diverged World Trade Volumes US, Germany and Japan Average Manufacturing and Services PMIs 25 58 Average 20 Manufacturing 56 PMI 15 Year-Over-Year (% change) 10 54 5 Index Level 0 52 -5 50 -10 Average -15 Services PMI 48 -20 -25 46 2001 2003 2005 2007 2009 2011
Slide 8: China's GDP Has Been Slowing Steadily
China's GDP Has Been Slowing Steadily China's Real GDP Growth 2018 2019 2020 6.9 Three biggest challenges in the 6.8 coming decades Loss of low-cost advantage 6.7 Population ageing De-globalization 6.6 Percent 6.5 6.4 6.3 6.2 6.1 Q1 Q2 Q3 Q4 Source: IMF. As of 30 Ap r 19 Note: Dotted lines rep
Slide 9: China Growth: Healthy Domestic Demand and Robust Stimulus Is Supportive
China Growth: Healthy Domestic Demand and Robust Stimulus Is Supportive We expect stimulus measures to remain in place until signs of economic stabilization appear. Room to Ease China’s Recent Measures to Ease Credit and Stabilize Growth Comments Further? Reserve 6 broad-based cuts and 5 targeted
Slide 10: Japan
Japan The current fiscal and monetary policy mix supports moderate growth. Japan Inflation 5 Unemployment 4 3 2 Core CPI (YoY, excluding fresh Percent food and tax hike effects) 1 0 Core CPI (YoY, excluding fresh foods, energy and effects of sales tax) -1 -2 2012 2013 2014 2015 2016 2017 2018 2019 S
Slide 11: Eurozone Growth Remains the Principal Source of Global Growth Worries
Eurozone Growth Remains the Principal Source of Global Growth Worries Citi Economic Surprise Index 80 60 40 Eurozone 20 0 Index -20 -40 -60 -80 -100 -120 Jan 18 Mar 18 May 18 Jul 18 Sep 18 Nov 18 Jan 19 Mar 19 May 19 Jul 19 Sep 19 Source: Bloomberg. As of 25 Sep 19 11
Slide 12: Eurozone Fiscal and Monetary Accommodation Should Bear Fruit
Eurozone Fiscal and Monetary Accommodation Should Bear Fruit The structural budget balance is more accommodative. ECB Policy Rate Government Interest Expenditure 4 7 Italy France 6 Germany Eurozone 3 5 % of GDP 2 4 Percent 1 3 2 0 1 -1 0 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2000 20
Slide 13: ECB Made a New Commitment and Simultaneously Downgraded Inflation Outlook
ECB Made a New Commitment and Simultaneously Downgraded Inflation Outlook ECB Staff Projections March 2019 Meeting June 2019 Meeting September 2019 Meeting 1.8 1.6 1.6 1.6 1.5 1.5 1.4 1.4 1.4 1.2 1.2 1.0 Percent 1.0 0.8 0.6 0.4 0.2 0.0 2019 2020 2021 2019 2020 2021 2019 2020 2021 GDP Growth Inflatio
Slide 14: US Economy Remains Solid
US Economy Remains Solid Good Consumer Fundamentals – High Savings Rate, Low Debt Service Ratio High Personal Savings Rate, Low Debt Service Ratio 11.0 13.5 10.0 13.0 9.0 12.5 8.0 12.0 Personal Savings Rate (left) 7.0 Percent Percent 11.5 6.0 Household Debt Service Ratio (right) 11.0 5.0 10.5 4.0 3.
Slide 15: Inflation Has Remained Low, Even as Unemployment Gap Has Closed
Inflation Has Remained Low, Even as Unemployment Gap Has Closed “Low inflation seems to be the problem of this era, not high inflation.” – Jerome Powell, August 23, 2019 Core PCE Inflation and the Unemployment Gap -2.5 3.0 -1.5 Unemployment Gap (left, inverted) 2.5 -0.5 2.0 Percent, Year-Over-Year 0
Slide 16: Central Banks Moving Toward Commitments on Realized Inflation
Central Banks Moving Toward Commitments on Realized Inflation Bank of Japan “The Bank will continue expanding the monetary base until the year-on-year rate of increase in the observed CPI (all items less fresh food) exceeds the price stability target of 2 percent and stays above the target in a stab
Slide 17: Equities and TIPS Breakevens Have Diverged This Year
Equities and TIPS Breakevens Have Diverged This Year Inflation Breakevens and S&P 500 Index 2.3 3,200 2.2 5y5y Breakeven Inflation (left) S&P 500 (right) 3,000 2.1 2,800 2 Percent Index 1.9 2,600 1.8 2,400 1.7 2,200 1.6 1.5 2,000 Sep 17 Dec 17 Mar 18 Jun 18 Sep 18 Dec 18 Mar 19 Jun 19 Sep 19 Source:
Slide 18: Fed Has Highlighted the Benefits of a Hotter Labor Market
Fed Has Highlighted the Benefits of a Hotter Labor Market “But that rate alone does not fully capture the benefits of this historically strong job market. Labor force participation by people in their prime working years has been rising…People who live and work in low- and middle-income communities t
Slide 19: US Treasuries
US Treasuries US Treasury Yield Curves 31 Dec 18 – 20 Sep 19 4 31 Dec 18 3 Percent 2 20 Sep 19 1 0 3m 1 2 3 4 5 7 10 30 Maturity (yrs) Source: Bloomberg. As of 20 Sep 19 US Treasury Total Return 31 Dec 18 - 20 Sep 19 25 20.3 20 15 Percent 10.0 10 5.6 5 2.7 0 2-Year 5-Year 10-Year 30-Year Source: Blo
Slide 20: Central Banks Around the World Are Easing Aggressively
Central Banks Around the World Are Easing Aggressively Country/Region Policy Rate 1-Year Change (bps) 6-Month Change (bps) Turkey 16.50% -125 -750 Egypt 15.25% -250 -150 Ukraine 16.50% -150 -150 Brazil 5.50% -100 -100 Chile 2.00% -50 -100 India 5.40% -110 -85 Iceland 4.50% -50 -75 New Zealand 1.00%
Slide 21: Global Governments
Global Governments The prevalence of negative yields remains. Country 1-Year 2-Year 3-Year 4-Year 5-Year 6-Year 7-Year 8-Year 9-Year 10-Year 15-Year 20-Year 30-Year Lowest Credit Rating Switzerland -1.13 -1.13 -1.15 -1.16 -1.18 -1.16 -1.15 -1.15 -1.20 -1.14 -0.93 -0.86 -0.70 AAA Germany -0.80 -0.91
Slide 22: Lower Yields Has Made It Harder for Investors to Meet Return Targets
Lower Yields Has Made It Harder for Investors to Meet Return Targets Risk Free Returns Significantly Below Target Returns 9 Median Assumed Rate of Return on Public Pension Plans Average Annual Yield on 30-year Treasury Bond 8 7 6 Percent per Annum 5 4 3 Current Yield 2 = 2.18% 1 0 1992 2017 Source:
Slide 23: The US Is Virtually the Only Destination in the Global Search for Yield
The US Is Virtually the Only Destination in the Global Search for Yield US Share of the Global Broad Market Index 100 93% 90 80 70 Yield (%) 60 50 40 30 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 Note: Based on index eligible debt in the BofA Global Broad Market Index Source: ICE Da
Slide 24: Spread Sector Excess Returns
Spread Sector Excess Returns Year-to-date, spread sectors have recovered from last year’s dramatic selloff. YTD 2019 Excess Returns 12 10.6 10 8.8 8 7.2 Percent 6 4.9 4.2 4.3 4.3 3.8 4 2.9 1.7 1.9 2 0.0 0 US EM US Australia Euro US IG EMD UK IG US US Euro European MBS Local CMBS IG Credit Credit Cre
Slide 25: Housing Fundamentals Remain Solid
Housing Fundamentals Remain Solid First-Time Homebuyers’ Affordability Benefiting from Falling Rates and Rising Incomes 28 Monthly Payment as Percent of Income Mortgage Payment as Percent of Income 26 24 23.00 22 Long-Run Average 22.25 20 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2
Slide 26: Agency Mortgage Spreads Relative Value to Investment-Grade Credit
Agency Mortgage Spreads Relative Value to Investment-Grade Credit IG vs. MBS 120 100 IG Intermediate - MBS ZV (spreads bps) 4Q14 QE 3 Ended 4Q17 Fed Unwind 80 60 40 20 Current Spread 0 Jan 13 Jan 14 Jan 15 Jan 16 Jan 17 Jan 18 Jan 19 Source: Bloomberg Barclays, Western Asset. As of 19 Sept 19 26
Slide 27: State of the US Commercial Real Estate and Credit Market
State of the US Commercial Real Estate and Credit Market Vacancy Rate for Office/Retail/Industrial in Top-50 Metros Yearly Vacancy Rate Average Vacancy Rate (2003-2018) Consumer Balance Sheets Have Improved Along With Default Rates 14 14 7 12 13 6 10 5 12 Debt Service Credit Charge- Vacancy Rate (%)
Slide 28: Investment-Grade Credit
Investment-Grade Credit Spreads are 36 bps tighter on the year. Stay the course. Bloomberg Barclays U.S. Credit Index Option-Adjusted Spread 230 210 190 Basis Points 170 150 130 110 US Credit: +107 bps 90 70 2012 2013 2014 2015 2016 2017 2018 2019 Source: Bloomberg Barclays. As of 19 Sep 19 Excess r
Slide 29: Investment-Grade Credit – No Near-Term "Avalanche" of BBB Downgrades
Investment-Grade Credit – No Near-Term “Avalanche” of BBB Downgrades The management teams of the largest issuers are focused on lowering, or at least maintaining, their leverage levels. YTD Excess Returns¹ bps Bloomberg Barclays US Credit Index +389 BBB +541 A +321 25 Largest BBB Issuers Total IG In
Slide 30: US Credit Markets Offer Both Attractive Yield and Size
US Credit Markets Offer Both Attractive Yield and Size Relative to other mature markets, US credit markets are attractive to a global investor. Credit Market Yields and Size Market Value (left) YTW (right) 10 5 9 8 4 7 6 3 USD (trillions) Percent 5 4 2 3 2 1 1 0 0 JPY IG EUR IG UK IG Asia IG US IG S
Slide 31: European Banks Have Much Stronger Balance Sheets
European Banks Have Much Stronger Balance Sheets Regulatory framework support resilience Simpler/Safer/Stronger 2018 EBA stress test highlights resilience of capital positions to severe macroeconomic scenarios; 2018 adverse scenario based on GDP contraction by 2.7%, unemployment rising to 9.7% and r
Slide 32: High-Yield Issuance Quality and Supply/Demand Balance
High-Yield Issuance Quality and Supply/Demand Balance High-Yield New Issue: Use of Proceeds Refinance General Acquisition/LBO Dividend 100 80 60 Percent 40 20 0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Source: J.P. Morgan. As of 02 Sep 19 High-Yield Bond Supply Shortage (USD, billions)
Slide 33: Higher EM Yields Compiled With Weak Currency Presents Buying Opportunity
Higher EM Yields Compiled With Weak Currency Presents Buying Opportunity J.P. Morgan GBI-EM Global Div Price Index 180 170 160 150 140 Index Level 130 120 110 100 90 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Source: J.P. Morgan, Bloomberg. As of 20 Sep 19 33
Slide 34: Real Yield Differential and Core Inflation Rates for Emerging and Developed Markets
Real Yield Differential and Core Inflation Rates for Emerging and Developed Markets Real Yield Differential (EM¹ vs. DM²) Emerging Market Inflation 400 8 300 7 EM Core Inflation 6 200 5 Basis Points 100 Percent 4 0 3 -100 G10 GDP Weighted 2 Core Inflation -200 1 -300 0 2006 2008 2010 2012 2014 2016
Slide 35: Outlook
Outlook September 2019 Downside risks have risen, but global growth should prove to be resilient US and global inflation rates continue to moderate Aggressive central bank easing is designed to truncate downside risks Central bank focus on core inflation outcomes suggests “low for long” Trade fricti
Slide 36: Questions & Answers
Questions & Answers QA TN “WESTERN ASSET iw sie, (ans, 36
Slide 37: Thank you.
Thank you. rN ; “| WESTERN ASSET
Slide 38: Risk Disclosure
Risk Disclosure © Western Asset Management Company, LLC 2019. 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 confidenti