Western Asset Managed Municipals Fund · NYSE:MMU
Western Asset Managed Municipals Fund — Investor Presentation (January 2024)
31 slides from Western Asset Managed Municipals Fund's investor presentation, Jan 11, 2024
Slide 1: 1Q24 Market & Strategy Update
1Q24 Market & Strategy Update January 11, 2024 Ken Leech John Bellows Co-Chief Investment Officer Head of Broad Markets 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 Inflation Right Around Fed's Target Recently
Core Inflation Right Around Fed’s Target Recently 1.9% per year average over last 6 months Core Inflation: CPI and PCE 10 8 6 Core CPI 4 Percent Per Year 2 2% Inflation Core PCE 0 -2 -4 -6 2019 2020 2021 2022 2023 Source: Bureau of Labor Statistics, Bureau of Economic Analysis, JP Morgan As of 30 No
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 10 12 8 10 6 8 Percent Percent 6 4 4 2 2 0 0 -2 -2 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2013 2014 2015 2016 2017 2018 2019 202
Slide 5: More Disinflation to Come in US
More Disinflation to Come in US Rent disinflation not yet fully reflected; goods prices have further to fall US Rent Inflation % Change, Year-over-Year Car Prices Remain Elevated 18% 160 Index, December 2019 = 100 BLS: Rent of Primary Residence Average Hourly Earnings 150 Used Car Prices Zillow: Obs
Slide 6: US Labor Market Moving Back Towards Balance
US Labor Market Moving Back Towards Balance Demand moderating, supply improving Employment Growth by Sector 3 Month % Change, Annualized Rate Labor Force 8% 115 Information, Native Born Foreign Born Index, Dec 2019 = 100 6% Trade/Transportation, 110 Leisure/Hospitality 105 4% Other 100 2% 95 0% 90 -
Slide 7: US Wage Growth Normalizing
US Wage Growth Normalizing Wage Growth Wage Growth for Selected Groups % Change, Year-over-Year % Change, Year-over-Year 9% 14% Average Hourly Earnings Employment Cost Index Job Switchers 8% Leisure and Hospitality 12% Total Private 7% 10% 6% 5% 8% 4% 6% 3% 4% 2% 2% 1% 0% 0% 2013 2015 2017 2019 2021
Slide 8: US Growth Moderation Likely to Continue
US Growth Moderation Likely to Continue Change in US Bank Lending Tight Credit Conditions 3 Month % Change, Annualized Rate 30% Savings Rate Likely to Rise 20% High Interest Rates Deter Investment 10% Especially in Housing and Manufacturing 0% Fiscal Impulse a (Small) Drag C&I -10% Consumer Reopen
Slide 9: Powell Moves From "Pain" to "So Far, So Good"
Powell Moves From “Pain” to “So Far, So Good” “While higher interest rates, slower growth, “Inflation keeps coming down. The labor and softer labor market conditions will bring market keeps getting back into balance. And down inflation, they will also bring some you know, it's so far, so good, altho
Slide 10: FOMC Discussion Turns Towards Cuts
FOMC Discussion Turns Towards Cuts But FOMC also forecasts Fed funds remaining well above inflation rate Fed Funds and Core PCE 8% “The question of when will it become appropriate to Fed Funds Core PCE, 3 Month, Annualized Rate begin dialing back the amount of policy restraint in place, that begins
Slide 11: Interest Rates Remain Elevated
Interest Rates Remain Elevated 10- Year Real Yields Market and Fed “Neutral” Rates 3.0 5.0 US Treasury 30-Year 1-Month Rate 2.0 4.5 FOMC Long-Run Dot US 4.0 1.0 3.5 0.0 Percent Germany 3.0 -1.0 2.5 -2.0 2.0 UK -3.0 1.5 -4.0 1.0 2012 2014 2016 2018 2020 2022 2024 2012 2014 2016 2018 2020 2022 2024 So
Slide 12: Europe: Stagnant Growth With Inflation Closing in on Target
Europe: Stagnant Growth With Inflation Closing in on Target Growth: Stagnation to mild contraction Inflation: Continues to fall more quickly than ECB forecast ECB: Still more concerned about upside inflation risks (that assessment will change soon) ECB: Policy historically tight given growth
Slide 13: United Kingdom: Less of an Outlier
United Kingdom: Less of an Outlier Base effects are finally reflecting in energy and food prices Slowing is being seen across all components and recent prints have surprised to the downside (sharp contrast to the early past of last year) Contributions to UK Headline Inflation (YoY) Services Good
Slide 14: China: Underwhelming Post-Covid Economic Rebound
China: Underwhelming Post-Covid Economic Rebound Government growth targets are achievable but consumer confidence is weak. The post-Covid economic rebound in 2023 disappointed the market, with external forecasters expecting 2024 growth below authorities’ 5% target. In the face of continuing pres
Slide 15: Japan: Wage Pressure Slowly Building as Employment and Growth Outlook Brightens
Japan: Wage Pressure Slowly Building as Employment and Growth Outlook Brightens Wage increased following the results of spring wage Employment Conditions Survey: BoJ Tankan survey: employment negotiation and the tight labor market. conditions DI suggests a deepening labor shortage. Core CPI Wage (ba
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: Spread Sector Excess Returns
Spread Sector Excess Returns 2023 Excess Returns 10 8.7 8.9 9 8.2 8 7.7 7 6.6 6 Percent 4.9 5 4.2 4.3 4 3.8 3 2.3 2 1.7 1.1 1 0.7 0 US US Non- European Euro IG US IG Australia UK IG EMD US EM Euro US MBS CMBS Agency Banks Credit Credit IG Credit Credit USD Bank Local High- High- RMBS (CoCo) Loans¹ C
Slide 18: US Treasury Yield Curves
US Treasury Yield Curves US Treasury Yield Curves 5.5 5.0 4.5 Percent 31 Dec 23 4.0 31 Dec 22 3.5 3.0 3M 1Y 2Y 3Y 5Y 7Y 10Y 30Y Maturity (yrs) Source: Bloomberg. As of 31 Dec 23 US Treasury Total Return 31 Dec 22 – 31 Dec 23 5 3.9 4 3.7 3.2 3 Percent 1.9 2 1 0 2-Year 5-Year 10-Year 30-Year Source: B
Slide 19: Corporates Have Solid Cash Flow and Debt Metrics
Corporates Have Solid Cash Flow and Debt Metrics Profit Margins 34 32 30 Percent 28 26 24 22 20 1Q04 1Q06 1Q08 1Q10 1Q12 1Q14 1Q16 1Q18 1Q20 1Q22 ~180 Non-Financial Companies (JULI Based) Weighting based on amount of debt in the benchmark Source: J.P. Morgan. As of 30 Sep 23 Median Leverage: Non-Fin
Slide 20: High-Yield Fundamentals
High-Yield Fundamentals Ability to Service Debt Also Supportive of Maturity Wall for High-Yield Bonds and Loans Lower than Average Defaults 600 8.0x Bloomberg U.S. Corporate High Yield 2% Issuer Capped High-Yield Interest Coverage Morningstar LSTA Leveraged Loan Index 7.0x 500 6.0x 400 USD (billions
Slide 21: Dramatic Flattening of the Credit Curve in 2H23
Dramatic Flattening of the Credit Curve in 2H23 Yield-based buyers locking in attractive all-in yields were met with dwindling long end supply. Low Long-End Supply in 2023 10s30s Credit Curve 35% 60 Share of 20- and 30-year supply, non-financials 55 30% Median 50 45 25% 40 Basis Points 35 Average: 2
Slide 22: Credit Rating Upgrade Opportunities Still Exist
Credit Rating Upgrade Opportunities Still Exist Annual Fallen Angel and Rising Star Volumes High-Yield Net Leverage 100 20% 4.0x 70-90 80 15% 60 10% 40 3.5x 5% Percent of Index 20 USD (billions) 0 0% -20 -5% 3.0x -40 20-40 -10% -60 -15% -80 202 111 -100 -20% 2.5x '06 '08 '10 '12 '14 '16 '18 '20 '22
Slide 23: Agency Mortgage-Backed Securities Remain Fundamentally Attractive
Agency Mortgage-Backed Securities Remain Fundamentally Attractive Agency MBS spreads widened as Fed and banks support diminished and volatility was elevated Prepayment risk remains muted as mortgage borrowers have little refinancing incentive FNMA 30-Yr Production Post GFC Average OAS Fed Runoff
Slide 24: 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 25: Commercial Mortgages (CMBS) are Widely Panned but Misunderstood
Commercial Mortgages (CMBS) are Widely Panned but Misunderstood Unfairly maligned, CMBS credit spreads remain wide of peak COVID 2020 distressed levels while spreads of similar commercial real estate exposures recover Office sector has been uniquely impacted by COVID; however, the 4 other primar
Slide 26: 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 coupled with moderate economic grow
Slide 27: Nearshoring Set to Benefit EM
Nearshoring Set to Benefit EM 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 beneficiaries of nears
Slide 28: 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 29: Questions & Answers
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Slide 30: Thank you.
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Slide 31: 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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