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Euro Aggregate Investment Highlights 2Q 2021 Euro Aggregate Performance Review Global Bond and Currency Returns Euro Aggregate portfolios outperformed their benchmarks Country 9 7.1 in 2Q21: 6 3.1 Overweight exposures to corporate bonds and hard 3 2.2 2.5 0.4 1.1 1.3 currency EM bonds were positive. 0 -0.6 -0.6 -0.4 -0.4 -0.3 -0.2 Total Returns (%) Total -3 An opportunistic allocation to US and Australian Govt Year Bond 7–10 France Italy Germany Spain Mexico Poland Japan UK China* Australia US Indonesia*S. Africa* duration added to returns. Sector A flattening of global yield curves was beneficial. 3.0 EU UK US EM Tactical positioning in inflation-linked bonds added 1.7 1.9 1.7 2.0 1.5 1.2 0.9 1.1 1.0 to returns. 1.0 0.6 Currency positioning was a positive, driven by an 0.0 overweight position in the Hungarian forint. Excess Returns (%) -0.3 -1.0 Euro Euro UK UK US US US US USD EM EM Corp HY Corp HY Corp MBS HY TIPS Sovereign Corp Portfolio Activity Currency 6 Reduced eurozone duration by cutting exposure 3.4 4.1 4 2.5 2.6 to longer-dated French government bonds early 2 0.5 0.9 1.4 in the quarter. 0 -2 -0.8 -0.8 -0.3 Reduced US and UK duration during the quarter -1.8 -1.3 -1.2 -4 -2.4 NOKAUD JPY INR GBP USD KRW CAD SEK CNY PLN MXN ZAR RUB as yields declined. ReturnsTotal vs EUR (%) Closed short position in Czech interest rate swaps. Source: Bloomberg, Bloomberg Barclays, ICE BofA Merrill Lynch, J.P. Morgan. As of 30 Jun 21. Reduced exposure to inflation-linked bonds. * Country returns for China, Indonesia and South Africa are of the all maturity country index. Increased exposure to reopening industries within corporate bonds. number of countries, delaying the lifting of some restrictions, threatening Added exposure to the Norwegian krone and Polish zloty versus reopening plans elsewhere and tempering some of the optimism around the euro. the global economic recovery. Emerging market (EM) central banks continued to tighten monetary policy, with Brazil and Russia among Market Review those to hike interest rates in an attempt to curb upward inflationary Risk sentiment remained positive and credit spreads narrowed as COVID-19 pressures. Mexico also surprised markets with a rate hike, causing local vaccine programs accelerated and markets looked forward to econo- bond yields to increase. mies reopening. Eurozone government yields rose sharply at the start of the quarter but retraced somewhat as the European Central Bank Investment Outlook (ECB) pledged to keep asset purchases under its Pandemic Emergency Western Asset expects the eurozone growth rebound to kick into high Purchase Programme (PEPP) at a significantly higher pace. US economic gear in the second half of the year as the vaccination drives across the data showed some divergence, with employment data weaker than ex- continent approach herd immunity toward the end of the third quarter pected while inflation surprised to the upside. Influenced by the recent and workers currently in furlough and related schemes rejoin the labor higher than expected realized inflation, Federal Open Market Committee market. The main risk to our outlook is a further delay due to Covid variants. (FOMC) officials brought forward their interest rate hike projections such We believe the growth momentum can continue into 2022 given that that the median member now expects two hikes in 2023, having previ- EU fiscal rules will remain suspended. The Next Generation EU recovery ously predicted that the first hike would come only in 2024. This shift had fund has started to issue marketable securities and first disbursements the effect of lowering longer-term market-based inflation expectations, to member states will begin in the third quarter. These flows will play a which had built steadily since the start of the year, as market participants much larger role in 2022 outcomes and may be quite sizeable in certain anticipate a more reactive FOMC should inflation prove to be less transient. economies. Eurozone inflation is on a rising trend but is expected to As a result, long-dated US Treasuries (USTs) rallied strongly and the yield peak in 4Q21 and fall back soon thereafter due to significant base and curve flattened. Developed market (DM) government bonds were also special effects. Beyond that, however, inflation in the eurozone is likely supported towards quarter-end as the COVID-19 delta variant spread in a to remain muted over the medium term as there is still little sign of wage Euro Aggregate pressures, significant credit expansion or rising longer-term inflation expectations. That said, we do expect markets to become more concerned about inflation in the second half of this year as inflation data in selected jurisdictions might be close to 4%. We expect the ECB to start tapering in September by reducing the amount it purchases under the PEPP facility as long as sovereign yields rise gradually and in line with the improving economic outlook. We have moved Euro Aggregate portfolios to a mild underweight overall duration stance. The Firm’s bias is to remain modestly overweight corporate bonds (especially in financials) and in select reopening industries where valuations have yet to fully recover and rising-star candidates where allowed. For more information on Western Asset, visit westernasset.com. © Western Asset Management Company, LLC 2021. This publication is the property of Western Asset and is intended for the sole use of its clients, consultants, and other intended recipients. It should not be forwarded to any other person. Contents herein should be treated as confidential and proprietary information. This material may not be reproduced or used in any form or medium without express written permission. Past results are not indicative of future investment results. This publication is for informational purposes only and reflects the current opinions of Western Asset. Information contained herein is believed to be accurate, but cannot be guaranteed. Opinions represented are not intended as an offer or solicitation with respect to the purchase or sale of any security and are subject to change without notice. Statements in this material should not be considered investment advice. Employees and/or clients of Western Asset may have a position in the securities mentioned. This publication has been prepared without taking into account your objectives, financial situation or needs. Before acting on this information, you should consider its appropriateness having regard to your objectives, financial situation or needs. It is your responsibility to be aware of and observe the applicable laws and regulations of your country of residence. Western Asset Management Company Distribuidora de Títulos e Valores Mobiliários Limitada is authorised and regulated by Comissão de Valores Mobiliários and Banco Central do Brasil. Western Asset Management Company Pty Ltd ABN 41 117 767 923 is the holder of the Australian Financial Services Licence 303160. Western Asset Management Company Pte. Ltd. Co. Reg. No. 200007692R is a holder of a Capital Markets Services Licence for fund management and regulated by the Monetary Authority of Singapore. Western Asset Management Company Ltd is a registered Financial Instruments Business Operator and regulated by the Financial Services Agency of Japan. Western Asset Management Company Limited is authorised and regulated by the Financial Conduct Authority (“FCA”) (FRN 145930). This communication is intended for distribution to Professional Clients only if deemed to be a financial promotion in the UK as defined by the FCA. This communication may also be intended for certain EEA countries where Western Asset has been granted permission to do so. For the current list of the approved EEA countries please contact Western Asset at +44 (0)20 7422 3000. Western Asset 2 Second Quarter 2021 Euro Aggregate Performance and Risk Disclosures June 30, 2021 Rolling 1-Year Performance Returns Period Ending: 30 Jun 21 30 Jun 20 30 Jun 19 30 Jun 18 30 Jun 17 EURO Core Full Discretion Broad Investment Grade Composite (gross of fees) 3.16% 3.07% 5.14% 1.26% -1.07% EURO Core Full Discretion Broad Investment Grade Composite (net of fees) 2.85% 2.76% 4.83% 0.96% -1.37% FTSE EuroBIG Index XEU Unhedged Index 0.46% 1.82% 5.57% 1.49% -2.22% Base Currency: EUR Past investment results are not indicative of future investment results. Source for performance figures is Western Asset. Please refer to the Performance Disclosure for more information. Currency exchange rate fluctuations will impact the value of your investment. The value of investments and the income from them may go down as well as up and you may not get back the amount you originally invested. Investment Risks: The strategy does not offer any capital guarantee or protection and you may not get back the amount invested. The strategy is subject to the following risks which are materially relevant but may not be adequately captured by the indicator: Asset-Backed Securities: The timing and size of the cash-flow from asset-backed securities is not fully assured and could result in loss for the strategy. These types of investments may also be difficult for the strategy to sell quickly. Bonds: There is a risk that issuers of bonds held by the strategy may not be able to repay the investment or pay the interest due on it, leading to losses for the strategy. Bond values are affected by the market’s view of the above risk, and by changes in interest rates and inflation. Concentrated: The strategy's investment approach may result in the strategy being focused in one, or a small number of, countries, sectors or asset classes compared to other investment strategies.
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