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Thank you for joining Western Asset’s The Year in Review webcast featuring Deputy CIO Michael Buchanan in conversation with Product Specialist Robert Abad.

Robert AbadMichael Buchanan

The presentation will begin shortly.

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Michael BuchananDeputy Chief Investment Officer

The Year in ReviewDecember 12, 2019

Robert AbadProduct Specialist

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3.15.9

10.0

20.7

0

5

10

15

20

25

2-Year 5-Year 10-Year 30-Year

Perce

nt

US Treasury Total Return 31 Dec 18 – 30 Nov 19

Source: Bloomberg Barclays. As of 30 Nov 19

31 Dec 18

30 Nov 19

0

1

2

3

4

3m 1 2 3 4 5 7 10 30

Perce

nt

Maturity (yrs)

US Treasury Yield Curves 31 Dec 18 – 30 Nov 19

Source: Bloomberg. As of 30 Nov 19

USTs Rallied on Moderate US Growth and Inflation, Fed Dovishness, and Trade Fears

4

200

250

300

350

400

450

500

550

600

020406080

100120140160180200

Jan 19 Mar 19 May 19 Jul 19 Sep 19 Nov 19

Basis PointsBasis

Poin

tsYear to Date Spreads

US Credit (left) Non-Agency CMBS (left) Agency CMBS (left)Agency MBS (left) US HY (right) EMBI Global (right)CEMBI Broad (right)

Source: Bloomberg. As of 10 Dec 19

With Few Exceptions, Global Credit Spreads Compressed Further

Spread Levels (bps)01 Jan 19 10 Dec 19 Difference

Bloomberg Barclays US Credit Index 143 97 -46Bloomberg Barclays Non-Agency CMBS Index 107 84 -23Bloomberg Barclays Agency CMBS Index 55 49 -6Bloomberg Barclays Agency MBS Index 35 44 9Bloomberg Barclays US High-Yield Index 526 351 -175J.P. Morgan EMBI Global 425 308 -117J.P. Morgan CEMBI Broad 338 262 -76Source: Bloomberg. As of 10 Dec 09

5

Services

Manufacturing

46

48

50

52

54

56

58

60

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Index

Leve

l

US, Germany and JapanAverage Manufacturing and Services PMI

Source: Haver, Western Asset. As of 30 Nov 19

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

Jan 17 Jul 17 Jan 18 Jul 18 Jan 19 Jul 19

Cumu

lative

Per

cent

Revis

ion to

Roll

ing F

orec

ast

J.P. Morgan Global Revision Index

US China

Euro Area Rest of World

Source: Bloomberg, J.P . Morgan. As of 06 Dec 19

Global Growth Conditions Appear to Be Stabilizing

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US (left)

Japan (left)

Euro (left)

EM Core Inflation* (right)

2.0

2.5

3.0

3.5

4.0

4.5

5.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

2013 2014 2015 2016 2017 2018 2019

PercentPe

rcent

Per Y

ear

Core Inflation Rates: 12-Month Changes in Core Consumer Inflation

Source: Bureau of Economic Analysis, Bloomberg. As of 31 Oct 19*EM Core Inflation data is quarterly, as of 30 Jun 19

Global Core Inflation Remains Below Target

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Credit Market Spreads and Returns

Current Spread (bps)

12-Month Spread (bps) YTD Change (bps)

Yield(%)

YTD Total Return (%)Tight Wide

Bloomberg Barclays US Credit BBB Index 140 140 197 -57 3.3 15.7Bloomberg Barclays US High-Yield 2% Issuer Cap BB Index 191 191 354 -73 3.8 14.1Bloomberg Barclays US Credit Index 100 100 143 -43 2.8 13.5Bloomberg Barclays US Credit A Index 79 79 118 -40 2.6 13.0Bloomberg Barclays US High-Yield 2% Issuer Cap B Index 368 357 531 -50 5.6 12.7Bloomberg Barclays US High-Yield 2% Issuer Cap Index 370 358 526 -53 5.6 12.1Bloomberg Barclays US Credit AA Index 57 57 81 -24 2.4 10.5S&P/LSTA Leveraged Loan BB Index 297 282 437 -139 4.8 8.4S&P/LSTA Leveraged Loan Index 504 418 551 -48 6.5 6.9S&P/LSTA Leveraged Loan B Index 525 445 580 -54 6.7 6.9J.P. Morgan CLO BBB Index 396 315 409 -11 5.6 6.7J.P. Morgan CLO BB Index 779 656 802 45 9.5 6.2Bloomberg Barclays US High-Yield 2% Issuer Cap CCC Index 979 714 989 -10 12.1 4.3Source: Bloomberg, J.P. Morgan, S&P/LSTA. As of 30 Nov 19

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Bank Loans (left)

High-Yield (left)

Bank Loan – High-Yield (right)

-3.5

-3.0

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

0

2

4

6

8

10

12

2011 2012 2013 2014 2015 2016 2017 2018

PercentYield

s (%

)

Bank Loan vs. High-Yield

Source: Credit Suisse. As of 30 Oct 19

Bank Loan Valuations Currently Look Attractive Relative to High-Yield

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50%

75%

100%

125%

150%

175%

200%

225%

Jan 17 Jul 17 Jan 18 Jul 18 Jan 19 Jul 19

Ratio

BSL CLO Lower Mezz Cheap vs. HYCLO BBB/HY CLO BBB/HY Avg. - 2Y CLO BB/HY CLO BB/HY Avg. - 2Y

Source: Wells Fargo Securities, Bloomberg, Bloomberg Index Services Ltd, Markit. As of 08 Nov 19

High-Yield/CLO Relative Value

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Consumer and Housing Fundamentals Appear on Solid FootingFavor credit risk on recently originated mortgages due to stringent underwriting standards

New MCAI (Indexed to March 2011 = 100)

Household Financial Obligations Ratio¹

0.8

0.9

1.0

1.1

1.2

0

200

400

600

800

1000

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Multiple*Ne

w MC

AI (I

ndex

ed to

Mar

ch 20

11=1

00)

Mortgage Credit Availability Continues to Be Tight

Source: BAML, Federal Reserve, MBA, Western Asset. As of 30 Nov 19¹Household debt to total disposable income in the United States. As of 30 Jun 19

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EM A - US A Spread

EM BBB - US BBB Spread

0

20

40

60

80

100

120

140

160

180

200

2012 2013 2014 2015 2017 2018 2019

EM USD Corporate Yields Are CurrentlyHigher than US CorporateYields

Source: Bloomberg, J.P. Morgan. As of 30 Nov 19

Basis

Poin

tsEM IG¹

US IG

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2008 2010 2012 2014 2016 2018

Net L

ever

age

Net Leverage – EM IG and US IG

Source: J.P. Morgan. As of 30 Sep 19¹Ex. 100% quasis, Real Estate

EM Corporates Offer Value and Diversification Versus US Credit

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Relative Sector Attractiveness in Relation to Trade War Risk

The above reflects the current opinions of Western Asset. As of 11 Dec 19.

Relative Sector Attractiveness in Relation to Trade War Risk

Sect

or A

ttrac

tiven

ess

High Banks IG & HY, Energy IG, M&M IG & HY

Medium Telecom IG, Telecom HY, Pharma HY Gaming IG & HY Auto IG

Low Chem IG & HY, Energy HY, Pharma IG, Util IG & HY Aero IG & HY, Retail IG & HYAgri IG & HY, Autos HY, Cap Goods IG & HY, Cons IG &

HY, FoodBev IG & HY, Tech IG & HY

Low Medium High

Degree of Trade Risk

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Questions & Answers

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Thank you.

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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 confidential and proprietary information. This material may not be reproduced or used in any form or medium without express written permission.

Past results are not indicative of future investment results. This publication is for informational purposes only and reflects the current opinions of Western Asset. Information contained herein is believed to be accurate, but cannot be guaranteed. Opinions represented are not intended as an offer or solicitation with respect to the purchase or sale of any security and are subject to change without notice. Statements in this material should not be considered investment advice. Employees and/or clients of Western Asset may have a position in the securities mentioned. This publication has been prepared without taking into account your objectives, financial situation or needs. Before acting on this information, you should consider its appropriateness having regard to your objectives, financial situation or needs. It is your responsibility to be aware of and observe the applicable laws and regulations of your country of residence.

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