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Thank you for joining Western Asset’s Markets on Edge
webcast featuring Deputy CIO Michael Buchanan in
conversation with Product Specialist Robert Abad.
Robert AbadMichael Buchanan
The presentation will begin shortly.
Michael BuchananDeputy Chief Investment
Officer
Markets on EdgeSeptember 19, 2019
Robert AbadProduct Specialist
Markets Unsettled by a Growing Number of Interconnected Risks
2018
US growth/inflation risk
Fed hawkishness
US-China trade tension
BBB (fallen angels) risk
North Korea
Brexit under May
2019
US recession risk
Fed policy error
Global trade tension
End of credit cycle
China/Hong Kong
Brexit under Johnson
Eurozone slowdown
Negative yield contagion
Saudi Arabia/oil markets
Repo market turbulence
20202018 2019 2020
?
Herd Mentality in the Global Rate Markets
-1.0
-0.8
-0.6
-0.4
-0.2
0.0
0.2
0.4
0.6
0.8
1.0
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
Sep 18 Nov 18 Jan 19 Mar 19 May 19 Jul 19 Sep 19
Yield (%
)Yie
ld (
%)10-Year Government Bonds
US (left) UK (left) Australia (left) Germany (right) Japan (right)
Source: Bloomberg Barclays. As of 17 Sep 19
-35
-25
-15
-5
5
15
25
35
46
50
54
58
2009 2011 2013 2015 2017 2019
Num
ber of Central B
anks Easing vs. T
ightening (6-m
onth lead)P
MI I
ndex
Global Manufacturing PMI (left)
# of Central Banks easing vs. tightening (right)
Source: J.P. Morgan. As of 30 Aug 19
Global Growth Could Receive a Boost From More Stimulus
US Recession Risk is Not Supported by the Fundamental Data
Source: Credit Suisse. September 2019
Start of
RecessionYield Curve Manufacturing Inflation Jobs Activity
Housing
ActivityCredit Activity Earnings
Nov 1973 –
Jan 1980 –
Jul 1981 –
Jul 1990
Mar 2001
Dec 2007
Present
Recessionary
Expansionary
Neutral
Credit Cycle Fears Have Been Alive and Kicking for Awhile
2012 – “Junk Bonds: Wall Street’s Newest Bubble?”
2013 – “Fed Governor Raises the Specter of a Bubble in Junk Bonds”
2014 – “… there could be another two years to go before this cycle comes to its natural end”
2015 – “The evidence we have compiled leads us to conclude that, indeed, a bubble is
building, specifically in the leveraged finance market …”
2016 – “… we're starting to enter the late stages of the credit cycle”
2017 – “Six signs we are near the end of the credit cycle”
2018 – “Insane junk bond bubble … the price of garbage on Wall Street keeps going up”
2019 – “Swelling US corporate debt raises risk of global financial meltdown”
0
500
1,000
1,500
2,000
2,500
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 1H 2019
US
D (
billi
ons)
Cumulative Capital Raised Cumulative Number of Vehicles Funded
Note: Includes first half of 2019 only Source: Private Debt International as of 30 Jun 19
Dollars Raised in Private Credit 2009-1H 2019
New Sources of Middle Market Financing Can Help Extend the Credit Cycle
No Indication of Near-Term Avalanche of BBB Downgrades
Source: Bloomberg, Western Asset. As of 18 Mar 19
Ticker Company Name Index Rating
Total IG Index Debt,
(USD, billions)
US IG Index
Weight (%) Industry Leverage Trend
Management Explicitly
Stated Leverage Target
1 T AT&T Baa2 $99.6 1.6 Wireline Lower Yes
2 VZ Verizon Communications Baa1 $73.1 1.2 Wireline Lower Yes
3 CVS CVS Health Baa2 $66.2 1.1 Health Care Lower Yes
4 ABIBB Anheuser-Busch Inbev Baa1 $64.1 1.0 Food & Beverage Lower Yes
5 GE General Electric Baa1 $45.4 0.7 Diversified Manufacturing Lower Yes
6 GM General Motors Baa2 $41.2 0.7 Automotive Stable No
7 CHTR Charter Communications Baa3 $37.7 0.6 Cable Satellite Stable Yes
8 ABBV Abbvie Baa2 $33.2 0.5 Pharmaceuticals Stable No
9 F Ford Motor Baa2 $33.1 0.5 Automotive Higher No
10 CI Cigna Baa2 $32.7 0.5 Health Care Insurance Lower No
11 ETP Energy Transfer Baa3 $29.9 0.5 Midstream Lower Yes
12 UTX United Technologies Baa1 $29.3 0.5 Aerospace/Defense Lower No
13 KMI Kinder Morgan Baa2 $26.6 0.5 Midstream Lower Yes
14 AMGN Amgen Inc Baa1 $25.0 0.4 Pharmaceuticals Stable No
15 BATSLN British American Tobacco Baa2 $24.9 0.4 Tobacco Lower Yes
15 Largest BBB Issuers
High-Yield Energy - OAS
High-Yield Retailers - OAS
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Bas
is P
oint
s
High-Yield Energy and Retail Sector Spreads
Source: Bloomberg Barclays. As of 31 Aug 19
“Mini-Cycles” Can Also Help Extend the Broader Credit Cycle
High-Yield Energy - OAS (left)
US High-Yield ex Energy - OAS (right)
300
350
400
450
500
550
600
650
700
750
800
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
Jan 15 Jan 16 Jan 17 Jan 18 Jan 19
OA
S (bps)OA
S (
bps)
Source: Bloomberg Barclays. As of 16 Sep 19
The Energy Sector Has Decoupled From the Broader High-Yield Market
7.32
2.68
0.51
0.14
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
0
1
2
3
4
5
6
7
8
US Europe UK Japan
US
D H
edged Yield
Siz
e of
Mar
ket (
US
D, t
rillio
ns)
Size of Market (left) USD Hedged Yield (right)
Source: Bloomberg Barclays. As of 12 Sep 19
US Credit Markets Offer Yield, Size and Liquidity
How Should Portfolios Be Positioned at This Stage of the Credit Cycle?
Source: Western Asset
Early (Recovery) Mid (Expansion) Late (Downturn) Recession (Repair)
IG Corporates ● ● ● ●
HY Corporates ● ● ● ●
Bank Loans ● ● ● ●
EM Debt ● ● ● ●
Structured Credit ● ● ● ●
Governments ● ● ● ●
Questions & Answers
Thank you.
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