US economic resilience and fixed income opportunities

Performance and expectations in fixed income markets

Looking at the past year’s performance in fixed income markets, there has been notable volatility in bond yields. However, spread products have shown resilience due to better-than-expected growth. Investment-grade companies have demonstrated strong balance sheets, leading to outperformance in spread products. Income has played a crucial role, with higher-income, less yield-sensitive sectors outperforming.

“I want to emphasize, the rise in interest rates has certainly been a challenge, but it’s come in the context of some very good performance in other parts of the fixed income market. In particular, as there has been an improvement in growth, we’ve seen pretty good performance from spread sectors that have a growth-related component.

“The places where there has been more income and less sensitivity to the rise in yields have clearly outperformed,” says Bellows.

Additionally, he also points out, there has been considerable focus on bond yields, especially treasury yields, which have experienced significant volatility. While this focus is justified, it’s also important to acknowledge the strong performance in other parts of the fixed income market. Credit quality remains robust, and the income offered in some spread sectors has been a significant driver of performance this year.

A significant part of Western Asset’s strategy revolves around generating substantial income from high-quality spread products, such as investment-grade bonds and agency mortgage-backed securities. These securities provide a stable source of income, often yielding significantly more than treasuries. The firm emphasizes the compounding nature of income, which, although may appear modest in the short term, accrues significantly over longer periods.

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