Western Asset Core Plus Bond Fund Class R · NASDAQ:WAPRX
Western Asset Core Plus Bond Fund Class R — Western Asset Management Company — Earnings Presentation (July 2024)
34 slides from Western Asset Core Plus Bond Fund Class R's earnings presentation, Jul 11, 2024
Slide 1: 3Q24 Market & Strategy Update
3Q24 Market & Strategy Update July 11, 2024 Michael Buchanan Ken Leech Co-Chief Investment Officer Co-Chief Investment Officer 1
Slide 2: 2024 Global Outlook
2024 Global Outlook Disinflation ongoing but uneven Central banks will ease policy to normalize real interest rates Economy has remained resilient, but is set to slow Fixed-income outlook US growth will slow but should avoid recession Global growth has downshifted and China is now a source of de
Slide 3: Core PCE Nears the Fed's Target
Core PCE Nears the Fed’s Target (Core PCE, Core CPI Ex-Shelter Have Been at Target for a Full Year) Core PCE 3m annualized Core PCE 6m annualized Core PCE 1yr annualized Core PCE Fed Core PCE Target 7% 6% 5% 4% 3% 2% 1% 0% -1% -2% 2019 2020 2021 2022 2023 2024 Source: Haver Analytics. As of 31 May 2
Slide 4: Global Disinflation Is Broad-Based and Ongoing
Global Disinflation Is Broad-Based and Ongoing Advanced Economies: Composite CPI Percent Change Year over Year, Seasonally Adjusted, 2015=100 Eurozone Inflation 12 10 10 8 8 6 Percent 6 Percent 4 4 2 2 0 0 -2 -2 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2005 2007 2009 2011 2013 201
Slide 5: Consumer Spending Continues to Downshift
Consumer Spending Continues to Downshift Control Retail Sales 16% 14% 12% 10% Year- 8% 6% over-Year 4% 2% 3-Month Moving 0% -2% Average Annualized -4% 2018 2019 2020 2021 2022 2023 2024 Source: US Census Bureau. As of 31 May 24 US Commercial Bank Lending to Consumers – Year-over-Year US Commercial B
Slide 6: Recent Growth Readings Have Been Soft
Recent Growth Readings Have Been Soft US Citi Surprise Index 100 80 60 40 Index Level 20 0 -20 -40 Jan 23 Apr 23 Jul 23 Oct 23 Jan 24 Apr 24 Source: Bloomberg. As of 05 Jul 24 6
Slide 7: Labor Market May Have Fully Normalized
Labor Market May Have Fully Normalized Wage Growth Job Openings, Quits, Hiring Rates All Near Pre-Pandemic Ave Hourly Earnings (3m %ch) ECI (quarterly %ch) Levels as Percent of Total Employment 10% 9% 7% Job Openings total Quits tot Hiring Rate tot 8% 6% Quits and Hiring Rate 8% Job Openings Rate 7%
Slide 8: US Fiscal Deficit Consequences Cut Two Ways
While Nothing Good Can Be Said About the US Fiscal Deficit – Its Economic Consequences Cut Two Ways US: Components of Fiscal Deficit Total Value of Credit in the US as a % of GDP 8% 400% US: Primary Surplus/Deficit US: Interest Payments/ GDP 4% Total Deficit/ Surplus 350% 0% 300% -4% 250% "If someth
Slide 9: Real Rates at Two-Decade Highs Are Compelling
Real Rates at Two-Decade Highs Are Compelling 2- and 5-year, 5-year forward CPI swaps near 2.5% are close to Fed inflation targets, though a bit below levels seen prior to the GFC In other words, Real Yields across the curve are near the highs seen in the last two decades TIPS Real Yield History 3.5
Slide 10: US Federal Reserve
US Federal Reserve Still on track to cut No “stag” or “flation” – Chair Powell, May 1, 2024 Fed Funds and Core PCE 8% Fed Funds Core PCE, 3m ar 6% 4% 2% FOMC Forecast 0% -2% 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 Source: Federal Reserve, Bureau of Economic Analysis, Haver Analyt
Slide 11: Europe: Stagnant Growth with Inflation Closing in on Target
Europe: Stagnant Growth with Inflation Closing in on Target Growth: Stagnation to modest expansion Inflation: Services/Core to begin downtrend ECB: Inflation concern ebbing. Two more cuts expected this year ECB: Policy historically tight given growth and inflation Policy HICP GDP 1999 to Cur
Slide 12: United Kingdom
United Kingdom “Finely Balanced” UK Inflation Has Reached Target Unemployment Rate Above Pre-Pandemic, And Rising 16 5.5 250 Headline CPI (YoY) Total Employment - Full Time, 3mth/3mth Change (right) 14 5.3 Unemployment Rate (left) 200 12 Goods (YoY) 5.1 150 10 Services (YoY) 4.9 100 Thousands 8 4.7
Slide 13: China Secular Headwinds – Debt, Demographics and De-Globalization
China Secular Headwinds – Debt, Demographics and De-Globalization Likely constrain the pace of future growth Increased debt likely constrains fiscal lever, diminishing returns LT demand growth likely constrained by demographic trends … of using fiscal lever … China Government Debt China Population 1
Slide 14: China: 2024 Growth Target Achievable
China: Despite Ongoing Cyclical & Secular Headwinds – 2024 Growth Target Achievable Flashpoints Potential 60% tariffs under Trump 2.0 scenario Global pushback on Chinese industrial policies Third Plenum – Unlikely to see secular/structural shifts – Additional incremental policy support for hou
Slide 15: Japan
Japan Higher wages along with higher inflation forecasts strongly suggest Japanese yields need to rise Policy rate Japanese trade union confederation (Rengo in Japanese) released the The BoJ will tighten policy to normalize real interest rates preliminary data of the wage negotiation (Shun-to) resul
Slide 16: EM Central Banks Have Been Ahead of the Curve
EM Central Banks Have Been 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
Slide 17: US Election…Difficult to Predict and Potential Market Impact
US Election…Difficult to Predict and Potential Market Impact Election surprises have been the norm this Bettting Odds: 2024 Balance of Power (Polymarket) year…France, India, South Africa, Mexico GOP Sweep Odds Dem Sweep Don’t Forget 2016 D WH, R Senate, D House R WH, R Senate, D House 2016 Election
Slide 18: Spread Sector Excess Returns
Spread Sector Excess Returns Year-to-Date Ending 30 Jun 24 6 5.1 5 3.9 4 3.1 3.2 3 2.0 2 1.6 1.7 1.5 1.5 1.5 Percent 1 0.8 0 -0.2 -1 -2 -3 -3.2 -4 EM US US IG Euro IG UK IG US Australia US US Euro EMD Non- European Local MBS Credit Credit Credit Bank IG Credit CMBS High- High- USD Agency Banks Curre
Slide 19: Valuation: US Credit at +88 OAS, Richly Valued
Valuation: US Credit at +88 OAS, “Richly Valued” 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: +138 bps Historical Average Excluding Financial Crisis and Pandemic²: 100 +124 bps C
Slide 20: 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 Vulnerability to Scrutiny Strength Mix Risk Confidence Erosion Diversified, Large US Banks High Very High Low Low Low Risk Narrow, Medium Regional US Banks Moderate Moderate
Slide 21: Energy Companies
Energy Companies 2022 About Deleveraging, 2023/2024 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 Upgraded Mergers in 2023-2024 Chevron Co
Slide 22: Moderate Growth Is the Sweet Spot for High Yield
Moderate Growth Is the Sweet Spot for High Yield In high growth periods or economic Median High-Yield Index Excess Returns by GDP Bucket recoveries (>4% real GDP) is typically good for high yield, but it can sometimes be HY BB B CCC better for equity 3 2 1 Moderate growth (0-4%) can be the sweet spo
Slide 23: High-Yield Default Rate Off Record Lows
High-Yield Default Rate Off Record Lows Actual vs. Implied Default Rates 30 25 20 Percent 15 Implied Default Rate 10 5 Actual Default Rate 0 1996 1997 1999 2000 2002 2003 2005 2006 2008 2009 2011 2012 2014 2015 2017 2018 2020 2021 2023 Source: Bloomberg, Western Asset. As of 31 May 24 Assumes 40% re
Slide 24: Fundamental Dispersion in High-Yield Supports an Active Approach
Fundamental Dispersion in High-Yield Supports an Active Approach Fundamentals remain supportive on average, but not for the most levered CCCs Many Companies Have Maintained Discipline With ...However, CCC Companies Leverage Rose Their Debt to EBITDA ... and Asset Coverage Declined 3.9 10.0 3.1 1.45
Slide 25: Bank Loan Valuations Remain Compelling for Higher Quality Loans
Bank Loan Valuations Remain Compelling for Higher Quality Loans Senior secured bank loans in the higher quality segment of the market exhibit attractive relative value and stable fundamentals with ample credit metrics. We continue to target BB credit profiles and select single-B credit profiles with
Slide 26: CLO Capital Structure Yields Remain Attractive
26 0 2 4 6 8 10 12 14 16 18 20 IG Bonds AAA AAA CMBS US MBS AAA 5Y SFR A Nonagency AAA AAA 4Y RPL A1 Nonagency 4.9 5.1 5.1 5.3 5.4 AAA 5Y Jumbo Nonagency AAA 2Y NON-QM Nonagency 5.7 5.9 AAA 5Y US CLO 6.5 IG Bonds AA AA AA 5Y SFR B Nonagency 5.1 5.4 AA 5Y US CLO 7.1 IG Bonds A A 5Y SFR C Nonagency 5.
Slide 27: EM vs. DM Credit Relative Value
EM vs. DM Credit Relative Value Investment-grade EM bond valuations screen as comparatively tight versus US investment-grade due to differences in ratings composition and technicals. EM high-yield bonds, particularly those issued by Frontier sovereigns, have performed well year-to-date 2024 and cont
Slide 28: Mexico Local – Attributes of an Attractive Carry Trade
Mexico Local – Attributes of an Attractive Carry Trade Tight Fiscal: AMLO ran reasonably tight fiscal accounts even Beneficiary of Geopolitical Trends: Mexico likely to benefit further through Covid and Claudia has signaled a similar approach… from nearshoring trends… Mexico Primary Balance Share of
Slide 29: Agency MBS Are Attractive With Low Prepayment Risk and No Credit Risk
Agency MBS Are Attractive With Low Prepayment Risk and No Credit Risk With current mortgage rates at 7% and the average borrower locked into a sub 4% rate, prepayment risk is low Agency MBS offer yield pick over A+ Corporates in higher coupons Yield vs. Duration Current Rate (7.11) % Total Balan
Slide 30: 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 31: CMBS Market Recovery Is Underway
CMBS Market Recovery Is Underway CMBS spreads have outperformed to start the year but the credit curve remains steep to historical norms Underwriting standards have tightened, exhibiting among the lowest LTVs and highest debt yields in market history YTD 2024 CMBS issuance exceeds YTD 2023 by
Slide 32: Questions & Answers
Questions & Answers OA oN “WESTERN ASSET Gi. ee 32
Slide 33: Thank you.
Thank you. i) rN WER? bg “ WasTERN ASSET
Slide 34: Risk Disclosure
Risk Disclosure © Western Asset Management Company, LLC 2024. 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 inform
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