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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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