Western Asset Core Plus Bond Fund Class R · NASDAQ:WAPRX
Western Asset Core Plus Bond Fund Class R — Western Asset Management Company — Earnings Presentation (September 2023)
35 slides from Western Asset Core Plus Bond Fund Class R's earnings presentation, Sep 28, 2023
Slide 1: 4Q23 Market & Strategy Update
4Q23 Market & Strategy Update September 28, 2023 Ken Leech Chief Investment Officer 1
Slide 2: 2023 Outlook
2023 Outlook Disinflation ongoing but uneven Fed tightening near end Economy has remained resilient in part due to renewed fiscal stimulus Current banking stress extremely complex but not systemic Fixed-income outlook US growth will slow but should avoid recession Global growth has downshifted a
Slide 3: Core Inflation Moving Toward Fed Target
Core Inflation Moving Toward Fed Target Core CPI Using ApartmentList.com New Lease Rates for Shelter 3-mo a.r.; Seasonally adjusted ApartmentList 16% Core CPI 14% Core CPI using ApartmentList for Shelter inflation 12% 10% 8% 6% 4% 2% 0% -2% -4% -6% -8% Jan 20 Jul 20 Jan 21 Jul 21 Jan 22 Jul 22 Jan 2
Slide 4: Global Inflation Is Broadly Declining
Global Inflation Is Broadly Declining US Zillow Home Value Index and ApartmentList Rent Chinese PPI and US Core Import Prices in Deflation Monthly Changes Stabilizing Near Zero 12 3.0% China PPI Manufacturing YoY Index ZHVI mom 10 2.5% Monthly Percent Change Core Import YoY Raw Unsmoothed, nsa 8 2.0
Slide 5: FOMC Expects Restrictive Policy for an Extended Period
FOMC Expects Restrictive Policy for an Extended Period Projections are “Highly Uncertain” Fed Funds and Core PCE 8% “We see the current stance of monetary Fed Funds Core PCE, 3m ar policy as restrictive, putting downward pressure on economic activity, hiring, and 6% inflation.” 4% “These projections
Slide 6: Monetary Policy Is Already Tighter Than It Looks
Monetary Policy Is Already Tighter Than It Looks Proxy Funds Rate and Effective Funds Rate Real M2 8 30 7 25 6 20 Year-over-year percent change 5 Proxy Funds Rate (includes balance sheet policy and 15 Percent (annualized) 4 forward guidance) 10 3 5 2 0 1 Effective Funds Rate -5 0 -1 -10 -2 -15 2009
Slide 7: Financial Conditions
Financial Conditions “Beyond changes in interest rates, bank lending standards have tightened, and loan growth has slowed sharply.” – Chair Powell, Aug 23, 2023 Banks Tightening Loan Standards Change in Bank Lending S&P Regional Bank ETF (KRE) Senior Loan Offier Opinion Survey 3m %ch, annual rate 70
Slide 8: Higher Rates Are Slowing Activity
Higher Rates Are Slowing Activity Industrial Production (12-Month % Change) Housing Market Activity 20% 1400 400 Single Family 1300 Housing Starts (left) 15% 350 1200 Mortgage Purchase 10% Index (right) 1100 300 5% 1000 0% 900 250 800 -5% 200 700 -10% 600 150 -15% 500 -20% 400 100 2017 2018 2019 202
Slide 9: Home-Buying Traffic, Affordability and Confidence All Down
Home-Buying Traffic, Affordability and Confidence All Down NAR Housing Affordability, NAHB Traffic, Conference Board Good Time to Buy a House NAR Affordability Traffic of Prospective Buyers CONSHOMF 225 90 80 200 70 Affordability Rebased 1980 = 100 175 60 Price/Income 50 150 40 125 30 20 100 10 75 0
Slide 10: Consumption Likely to Slow
Consumption Likely to Slow Recent consumption sustained by depleting savings Consumer confidence remains low Student loan reinstatement an additional headwind Savings Rate University of Michigan Survey 40% 130 Savings Rate Average 2015-2019 35% 120 30% 110 Consumer 25% 100 Confidence Index 20% 90 15
Slide 11: Consumers Are Stretched and Starting to Pull Back
Consumers Are Stretched and Starting to Pull Back Real Incomes & Real Consumption vs Pre-Covid Trends Growth in Consumer Loans Issued By Commercial Banks 20 16.5 20 13-week growth rate 16.0 19 16 15.5 Real Personal Trillion 2012 USD Per Year Trillion 2012 USD Per Year Income (left) 15.0 18 12 Percen
Slide 12: Wage Growth Moderating
Wage Growth Moderating Wage Growth (3-Month Average) Average Hourly Earnings* 10 8% 9 8 6% 7 Percent (year-over-year) 6 5 4% 4 3 2% 2 1 0 0% 2019 2020 2021 2022 2023 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Source: Hiring Lab. As of 31 Aug 23 Source: Bureau of Labor Statistics. As of 3
Slide 13: Labor Demand Moderating
Labor Demand Moderating Job openings declining. Aggregate hours work normalizing. Job Openings (left) Quits (right) Aggregate Hours 9% 6% 119 117 Aggregate Hours 2021-2022 Trend Index, 2007=100 8% 115 5% 113 7% 111 109 6% 4% 107 Percent of Employment 105 Percent of Employment 5% 2021 2022 2023 Sourc
Slide 14: Fiscal Is a Concern
Fiscal Is a Concern 2023 Inflation Reduction Act Student loan forgiveness Capital gains receipts Federal Budget Deficit (Trailing 12 months, % of GDP) 20% 18% 16% 14% 12% 10% 8% 6% CBO 4% Forecast 2% 0% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2
Slide 15: Long-Run Neutral Rates (R star)
Long-Run Neutral Rates (R star) “We are navigating by the stars under cloudy skies” – Chair Powell, Aug 28, 2023 Arguments for Lower Rates: Real GDP Growth Rates 8 Advanced Economies Long-run growth to remain low Post Debt-levels are elevated World 6 Pandemic Under-saving for retirement Averag
Slide 16: Forward Rates
Forward Rates Long-run market rates substantially above FOMC estimates US Treasury 30-Year 1-Month Rate FOMC Long-Run Dot 5.0 4.5 4.0 3.5 Percent 3.0 2.5 2.0 1.5 1.0 2012 2013 2015 2017 2019 2021 2023 Source: Bloomberg. As of 25 Jul 23 16
Slide 17: China: Moderating Expectations for Post-Covid Economic Rebound
China: Moderating Expectations for Post-Covid Economic Rebound Government Focused on "Around 5%“ GDP Growth Target The post-Covid economic rebound appears to be disappointing exuberant forecasts, with external forecasters increasingly skeptical of China’s 5% growth target despite ongoing policy adju
Slide 18: Europe's Growth Slowing and Core Inflation Will Follow
Europe’s Growth Slowing and Core Inflation Will Follow Growth: Stagnation to mild contraction Inflation: Service disinflation will strengthen, pushing down core inflation ECB: No further hikes expected Growth: Headline PMI Services and Manufacturing Inflation 70 6 70 Services Manufacturing Ser
Slide 19: United Kingdom: Inflation Is Falling, Belatedly
United Kingdom: Inflation Is Falling, Belatedly CPI (Overall Index) 12 Lower energy prices are allowing inflation to slow, which should continue 10 Price inflation from food and services has begun to slow 8 A large fall will be seen in October as lower regulated household energy Percent prices
Slide 20: Japan: Wage Pressure Slowly Building as Employment and Growth Outlook Brightens
Japan: Wage Pressure Slowly Building as Employment and Growth Outlook Brightens Employment Conditions Survey: BoJ Tankan survey: employment Wages increased following the results of spring wage negotiation. conditions DI suggests a deepening labor shortage. Headline CPI GDP Deflator Tankan: Employmen
Slide 21: EM Central Banks Are Ahead of the Curve
EM Central Banks Are Ahead of the Curve EM vs US Overnight Rates 12 EM policymakers tightened policy aggressively, starting in early 2021 well in front of the Fed. 10 With both EM and DM inflation having peaked, EM central banks have already started to cut rates despite the Fed 8 indicating no cuts
Slide 22: Spread Sector Excess Returns
Spread Sector Excess Returns Year-to-Date 2023 Excess Returns 7 5.9 6 5.5 5.1 5.1 5 3.9 4 2.7 2.9 3 2.7 2.5 2.2 2 Percent 1 0.4 0 -0.3 -1 -2 -3 -3.1 -4 European US US Euro IG US IG Australia UK IG Non- EMD EM US US Euro Banks MBS CMBS Credit Credit IG Credit Credit Agency USD Local High- Bank High-
Slide 23: Agency Mortgages Are Historically Cheap
Agency Mortgages Are Historically Cheap Mortgage spreads have widened significantly as Fed and bank support diminished Agency MBS spreads have widened and are cheap compared to high grade corporate bonds, especially in production coupons Prepayment risk remains muted as mortgage borrowers have
Slide 24: Valuation: US Credit "Fair" at +108 OAS
Valuation: US Credit “Fair” at +108 OAS Bloomberg U.S. Credit Index: Option-Adjusted Spread 600 +545 bps 500 Option-Adjusted Spread (bps) 400 +341 bps 300 +241 bps +231 bps 200 +154 bps Historical Average¹: +140 bps Historical Average Excluding Financial Crisis and Pandemic²: +125 bps 100 Credit OAS
Slide 25: The Two Tiers of the US Banking System
The Two Tiers of the US Banking System We prefer large US banks over regionals. Regulatory Balance Sheet Deposit Interest Rate Current Market Scrutiny Strength Mix Risk Confidence Diversified, Low Large US Banks High Very High Low High Risk Narrow, Medium Regional US Banks Moderate Moderate Medium L
Slide 26: Energy Companies: 2022 About Deleveraging, 2023 Capital Discipline, Upgrades and Mergers
Energy Companies: 2022 About Deleveraging, 2023 Capital Discipline, Upgrades and Mergers 2022 Debt 2022 Change in Index Upgraded in 2023/ Issuer ($mm) Debt ($mm) Positive Outlook IG Energy Index Change in Debt Outstanding 2022 -42,408 BP PLC 25,539 -5,000 Positive Outlook Chevron Corp 14,687 -4,700
Slide 27: High-Yield Credit: Valuations Are Compelling
High-Yield Credit: Valuations Are Compelling Yields rose by more than 4% since 2021 as rates rose Spreads now imply much higher defaults and spreads widened than the average since 1970 12 50 Default Rates (%) 10 8.75 40 34.1 Cumulative 27.5 Yield (%) 8 30 6 4.22 18.0 4 20 2 10 0 0 31 Dec 21 22 Sep 2
Slide 28: Bank Loan Valuations Relative to High-Yield
Bank Loan Valuations Relative to High-Yield Since 1992, high-yield has historically had a YTW with 87 bps premium over leveraged loans and 82 bps spread over loans driven by higher risk profile due to unsecured, subordinated position in capital structure relative to loans Credit Suisse Leveraged Loa
Slide 29: Mortgage Credit Offers Attractive Relative Value
Mortgage Credit Offers Attractive Relative Value While real estate prices are expected to cool from the record increases, market spreads are elevated with increased risk premiums During the housing boom of Covid, lending stayed conservative and single family markets remain well supported by long
Slide 30: Globalization Transitions Toward Friendshoring
Globalization Transitions Toward Friendshoring Some EM countries/regions are set to benefit from the evolution of global supply chains to reflect geopolitical considerations in addition to manufacturing costs. We would highlight Mexico, Dominican Republic, Costa Rica, and India as potential benefici
Slide 31: The USD and Commodities: Key Emerging Market Drivers
The USD and Commodities: Key Emerging Market Drivers EM central banks are closer to the end of the tightening cycle relative to the developed world USD relative strength and commodity prices are both inputs into EM economic conditions and returns A Fed pause combined with China reopening bodes well
Slide 32: 2023 Outlook
2023 Outlook Disinflation ongoing but uneven Fed tightening near end Economy has remained resilient in part due to renewed fiscal stimulus Current banking stress extremely complex but not systemic Fixed-income outlook US growth will slow but should avoid recession Global growth has downshifted a
Slide 33: Questions & Answers
Questions & Answers QA TN “WESTERN ASSET iw sie. fans, 33
Slide 34: Thank you.
Thank you. rN ; “| WESTERN ASSET
Slide 35: Risk Disclosure
Risk Disclosure © 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 confidenti
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