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CONTRIBUTORS

Michael Buchanan, CFA

Chief Investment Officer
Western Asset

Preview

In his latest market commentary, Western Asset CIO Michael Buchanan examines the impact of rising public debt and market concerns over government fiscal policies. Elevated debt levels and fiscal policies have increased bond market volatility. Michael discusses the implications of global debt burdens by region with Western Asset’s key macro decision-makers.

Key takeaways:

  • Public debt in many countries has risen to historical highs relative to output. There are concerns that the sustainability of government debt burdens and the risk of higher government bond yields, particularly in longer maturities, could escalate the cost of servicing debt.
  • Elevated debt and concerns over debt sustainability and fiscal policies have been factors behind the increase in volatility in government bonds, especially in countries with higher debt levels such as the US, UK and France.
  • As discussed in our recent blogs, concerns about the extent and impact of the Trump administration’s tariffs and the direction of US fiscal policy have raised questions about the global demand for USTs and other major government bonds by non-domestic investors.
  • We recognize that over short periods some investors may seek to impose fiscal discipline on governments they perceive as profligate for raising their borrowing costs. Over longer periods, however, we are confident that trends in inflation, economic growth and central bank policy will remain the primary determinants of DM bond yields.
  • Higher tariffs could impact prices, clouding inflation and monetary policy outlooks, but the scale, persistence and policymaker responses are highly uncertain. We expect inflation to slow gradually to central bank targets, which should facilitate further rate cuts, especially if economies falter. These macro fundamentals should underpin bond market valuations despite significant and persistent government borrowing needs.

WHAT ARE THE RISKS?

All investments involve risks, including possible loss of principal. Past performance is no guarantee of future results.  Please note that an investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.

Fixed-income securities involve interest rate, credit, inflation and reinvestment risks; and possible loss of principal. As interest rates rise, the value of fixed income securities falls.  Low-rated, high-yield bonds are subject to greater price volatility, illiquidity and possibility of default.

Municipal income may be subject to state and local taxes. Some income may be subject to the federal alternative minimum tax for certain investors. Capital gains, if any, are taxable.

Changes in the credit rating of a bond, or in the credit rating or financial strength of a bond’s issuer, insurer or guarantor, may affect the bond’s value.

US Treasuries are direct debt obligations issued and backed by the “full faith and credit” of the US government. The US government guarantees the principal and interest payments on US Treasuries when the securities are held to maturity. Unlike US Treasuries, debt securities issued by the federal agencies and instrumentalities and related investments may or may not be backed by the full faith and credit of the US government. Even when the US government guarantees principal and interest payments on securities, this guarantee does not apply to losses resulting from declines in the market value of these securities.

International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets. Investments in companies in a specific country or region may experience greater volatility than those that are more broadly diversified geographically. The government’s participation in the economy is still high and, therefore, investments in China will be subject to larger regulatory risk levels compared to many other countries. There are special risks associated with investments in China, Hong Kong and Taiwan, including less liquidity, expropriation, confiscatory taxation, international trade tensions, nationalization, and exchange control regulations and rapid inflation, all of which can negatively impact the fund. Investments in Taiwan could be adversely affected by its political and economic relationship with China.