WATFX – Q2 2019 Commentary
Western Asset Total Return Bond Fund outperformed the Agg during the quarter and now leads the benchmark by almost nearly 100 bps over the past year. The strategy benefited from its credit exposure and slightly extended duration relative to the benchmark during the quarter. The team expects global growth to be resilient on the back of steady U.S. growth, improving domestic conditions in Europe, and signs that sustained monetary and fiscal stimuli across Asia are gaining traction.
Market Overview:
– U.S. Treasuries generated a positive return during the second quarter as both short and long term yield declined
o Spread sectors also rallied over the quarter
– After yields generally moved higher in April, trade concerns dominated May and led to a risk off environment for much of the month
o Yields then moved sharply lower the Fed indicated it was getting closer to lowering rates
– Similar accommodative messaging by the ECB, also contributing to falling global bond yields
– Looking at the U.S. economy, according to the Commerce Department, Q1 2019 GDP growth was 3.1%
o Acceleration in GDP was attributed to positive contributions from exports, personal consumption expenditures, nonresidential fixed investments, private inventory investment, and state and local government spending
– The labor market remained tight during the second quarter
o Unemployment rate was 3.6% in both April and May (lowest rate since 1969)
o Workforce participation rate rose to 62.9% in June
– Manufacturing sector continued to expand but pace moderated during the second quarter
o PMI expanded for the 34th consecutive month in June, with reading of 51.7 versus 52.8 in April
Performance Overview:
– WATFX outperformed the Barclays Agg during the quarter
– Overweight to investment grade bonds contributed to results as spreads narrowed
o Individual contributors were BofA, Goldman, and Wells Fargo
– The fund’s investment grade EM exposure was beneficial for returns, as sovereign and corporate spreads also narrowed during the period
– Having a slightly higher duration than the Agg helped as rates moved lower across the curve
– Exposure to structured products were additive to results as spreads narrowed
– On the downside, the yield curve positioning was the largest detractor from performance
– Allocation to TIPS was a headwind for returns as breakeven inflation rates fell during the quarter
– Exposure to agency MBS was slightly negative for results
Market Outlook:
– Global growth concerns have intensified since last quarter
o Initial trade spat between the U.S. and China has morphed into a broader conflict with the risk of expanding on new fronts
– Markets have also been rattled by the prospect of a U.S. recession, a sustained slowdown in Eurozone growth, and higher oil price volatility
– Despite these concerns, the team expects global growth to remain resilient on the back of steady U.S. growth, improving domestic conditions in Europe, and signs that sustained monetary and fiscal stimuli across Asia
– Trade friction will be an ongoing drag on investor and business confidence, but central banks globally have become more explicit in their commitment to unleash additional policy accommodation
Performance Review:
Peter Malone, CFA
Research Analyst
Direct: 617.226.0030
Fax: 617.523.8118
Crestwood Advisors
One Liberty Square
Suite 500
Boston, MA 02109