Fixed Income Outlook Cautious Due to Lower-Than-Expected U.S. Growth

Chief Investment Officer at Western Asset Management Co.

The second half of the year should see very strong growth in global gross domestic product (GDP) as the world economy reopens. However, investors should be cautious about presuming a higher secular trend rate of growth or inflation based on these short-term cyclical boosts.

With manufacturing and homebuilding already having fully recovered, but with supply chain and hiring obstacles emerging, it seems that realized U.S. growth will fall short of the expectations that seem to be built into market pricing given how sharply term yields have risen in recent months.

Given this backdrop, investors might want to consider positioning portfolios to withstand further market volatility, yet have them remain flexible enough to capture value opportunities as they appear. Below is a summary of where we see value in U.S. fixed-income markets.

Investment-Grade Corporate Credit

We are optimistic on credit fundamentals and reassured that companies will maintain conservative balance sheet management. While favorable technicals endure, valuations have already returned to pre-Covid levels for many sectors. We are maintaining overweights to banking, select reopening industries and rising-star candidates where allowed.