CONTRIBUTORS
Michael Buchanan, CFA
Chief Investment Officer
Western Asset
We see 2026 as a year of opportunity for fixed-income investors. Improving global growth, anchored inflation, and supportive policy create a favorable backdrop. While volatility from fiscal and geopolitical developments may persist, it also opens the door for active managers to add value through selective positioning and disciplined risk management.
Key highlights:
- Global growth is expected to continue to improve in 2026, supported by fiscal stimulus and easier financial conditions, while tariff uncertainty has receded.
- US growth benefits from tax refunds and deregulation under the One Big Beautiful Bill Act; labor market softness persists but is not currently looking recessionary.
- Inflation is trending lower globally, anchored near central bank targets; US inflation progress continues despite tariff pass-through risks.
- Central banks appear to be near the end of easing cycles, with the Fed remaining responsive to labor market weakness; ECB likely on hold, BoJ expected to hike further.
- Investment-grade credit fundamentals remain strong, with issuance driven by AI related capital needs and elevated M&A activity.
- High-yield credit has been supported by disciplined corporate behavior and favorable technicals; defaults remain below historical averages.
- Structured products—CLOs and agency MBS—offer attractive relative value; commercial real estate spreads remain compelling.
- Emerging markets should benefit from high real yields and supportive local rate environments; active management favored in high-beta and frontier markets.
- Investor sentiment looks constructive, supported by attractive yields and improving fundamentals despite lingering geopolitical and fiscal risks.
Overview
In this quarterly report, Western Asset maintains an optimistic outlook for 2026 as global growth looks to improve, supported by fiscal stimulus and easier financial conditions. Tariff uncertainty has receded, removing a key headwind, while inflation has been trending lower toward central bank targets in many markets. In the US, growth is likely to be buoyed by deregulation and anticipated tax refunds under the One Big Beautiful Bill Act, though labor market softness persists. Europe and the UK face trade-related challenges, but stable inflation, increased defense/infrastructure spending and easier monetary should provide support. Japan’s persistent inflation points to further rate hikes, while China’s recovery remains policy-driven amid structural headwinds. Central banks are nearing the end of their easing cycles, with the Fed remaining responsive to labor market weakness. Investor sentiment looks favorable, supported by attractive yields and strong credit fundamentals. Despite tight valuations, we believe opportunities remain across investment-grade and high-yield credit, structured products, and select emerging markets. Western Asset continues to emphasize disciplined, value-driven investing across resilient sectors.
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.
Floating-rate loans and debt securities are typically rated below investment grade and are subject to greater risk of default, which could result in loss of principal. Inflation-linked securities are subject to liquidity risk, prepayment risk, extension risk and deflation risk.
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.
WF: 8419110