Western Asset eyes narrowing corporate bonds

The fund house remains focused on defensive industries and says risk assets should continue to outperform their risk-free government counterparts.

Improvements in the global economy and asset prices will continue, but not without interruption, according to Western Asset Management, the global fixed-income manager wholly owned by Legg Mason.

"We suspect the recent rally in fixed-income and equity prices involves a degree of herding, which may reverse itself with little notice. Still, non-government fixed-income prices should continue to trend higher as spreads compress in fits and spurts," says Mike Zelouf, director of international business at Western Asset.

"As investors demote the risk of a complete economic failure, risk assets should continue to outperform their risk-free government counterparts even as underlying economic conditions remain just lukewarm," he adds.

In terms of asset allocation and investment strategy, Zelouf says the fund house continues to focus on spread sectors and looks to benefit from the slow and unsteady compression of risk premiums.

"An overweight to corporate debt is our primary sector strategy. We remain focused on defensive industries and away from the retail sector and other cyclical issuers. We also believe that many financial companies have been unduly punished and their issues should either continue to rally or simply stabilise, thus offering compelling carry," says Zelouf.

With currencies remaining volatile, Zelouf is advising investors to approach these markets with caution.

"There are a number of deep structural shifts that argue for revaluation on a number of key crosses, but these have been overwhelmed by technical-based considerations for the time being," he says.

Western Asset will maintain a modest long euro, short US dollar strategy for tactical rather than strategic reasons.

"The dollar gained dramatically on the euro following the collapse of Lehman Brothers and we expect a partial reversal as financial conditions ease and risk appetite slowly returns," Zelouf says. "Only then will structural considerations have any influence on currency valuations."

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