� Coronavirus-related setbacks have

meaningfully reduced global growth.

However, we believe that the abject

pessimism and deep caution that

characterized Q2’s market sentiment

will abate as an incipient global re-

covery appears to be gaining traction.

� In the US, we expect a strong eco-

nomic rebound in Q3 from what was

effectively the first government-man-

dated recession in its history. However,

with social distancing strictures likely

to remain in place, the process of

complete recovery from the COVID-19

crisis will take time.

� A eurozone recovery is currently

underway on the back of a forceful

policy response, but growth across

the region will likely be uneven

and could become more vulnerable

to the reintroduction of economic

restrictions.

� Among EM regions, Asia is best poised

to weather the current medical and

economic challenges. However, we

see continued divergence in growth

among economies that have stronger

fiscal buffers and those with vulner-

able healthcare systems and limited

social safety nets.

Executive Summary

Third Quarter 2020

© Western Asset Management Company, LLC 2020. 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.

Western Asset’s base case outlook is for an elongated, U-shaped global economic recovery.

While coronavirus-related setbacks have meaningfully reduced global growth, an incipient

recovery appears to be gaining traction. We expect the battle against COVID-19 will take

time; however, we are encouraged by signs of progress in the global race for a vaccine

and the decline in global mortality rates, which suggests that renewed lockdowns are

unlikely. Forceful policy action to date has buoyed global economic activity and restored

market functioning. We expect central banks to remain extraordinarily accommodative,

especially in light of subdued global inflation pressures, and to remain so until the recovery

clearly begins and gains traction. Given that the timing and slope of an eventual recovery

are the greatest uncertainties, our portfolios are positioned to withstand further market

volatility, yet remain flexible enough to capture exceptional value opportunities as they

appear. Here, we provide a summary of the key drivers behind our global outlook and

details about where we see value across global fixed-income markets.

Western Asset Third Quarter 20202

US: Groping Toward Recovery

The recession endured by the US, which started in March, is striking in that it was effectively the first govern-ment-mandated recession in US history. The upside of this fact is that precisely because the recession was mandated by government edicts, it can be quickly reversed when those edicts are removed. While COVID case incidences have returned to peak levels recently, only about six weeks into a reopening of the US economy, we believe that widespread shutdowns will not be reintroduced.

At present, it is likely that Q2 GDP will register in the range of -30% to -35% (annualised), weaker than we expected in late-March. The bulk of these declines will occur in five extremely hard-hit service sectors: health care, restaurants, accommodations, passenger travel and recreational activities. However, there will also be notably sharp declines in construction, motor vehicle production and other goods-production sectors.We think it’s likely there will be essentially a complete recovery by the end of Q3 in sectors such as construction, manufacturing and non-leisure services, while accommodations and passenger travel will lag. However, health care and restaurants are far and away the largest contributors to GDP. Neither of these sectors is likely to return to pre-COVID activity levels, but both had already begun to bounce in May, and even partial rebounds there will power an extremely strong-sounding Q3 GDP number. Signals from vehicle and new-home sectors were also encouraging.

With some social distancing strictures likely to be in place for quite a while, we believe the process of complete recovery from the COVID crisis will take time, but possibly not the two to 10 years that various analysts think will be necessary.

We expect the eurozone to contract by around 9% this year, with Germany falling a relatively modest 6.5% compared to around 11% for Italy, France and Spain. A rebound is currently underway and appears swift for now—PMIs are back around 50—but will likely flatten out in the second half of the year and could become more vulnerable to the reintroduction of economic restrictions. Any recovery will also be uneven, depending

on the degree of policy support as well as a few other factors.

At a national level, fiscal stimulus has averaged around 3%-4% of GDP, but supplementary measures including government guarantees have varied widely, ranging from close to 0% to es-sentially open-ended. Germany stands out with its latest round of stimulus, taking total discretionary fiscal effort to almost 9% of GDP. Given the timing, some of this momentum will spill over into

2021, leading us to have higher expectations for the German rebound compared to other eurozone members. With labor markets in distress, the furlough schemes are the lynchpin of most fiscal policy responses across the continent and we expect them to be rolled over for now, fiscal space permitting.

Meanwhile, the ECB has increased its Pandemic Emergency Purchase Program (PEPP) by another €600 billion to €1.35 trillion and extended its duration by six months to mid-2020. These asset purchases are geared at ensur-

Europe: A Large Shock Invites a Significant Policy Response

Key Drivers

continued next page

We have higher expectations for the German rebound compared to other eurozone members.

We believe that widespread shut-downs will not be re-introduced.

Western Asset Third Quarter 20203

ing proper transmission of monetary policy in light of the recent market dislocations and have helped reduce government bond yields across the eurozone. In addition, the ECB’s latest Targeted Longer-Term Refinancing Operation (TLTRO) has attracted €1.35 trillion in bids for 3-year liquidity, most of which is like to be available to banks at the lowest possible interest rate (-1%).

In the UK, the Bank of England has so far refrained from cutting rates into negative territory, but its QE program has recently been increased by another £100 billion. The fiscal stimulus measures are among the largest (at approximately 8% of GDP) across countries in Europe. Negotiations for the post-Brexit trade relationship between the UK and the continent have intensified and, while there are many outstanding issues, our base case remains that both sides will reach an accord on some form of free trade agreement that would be better than the WTO baseline.

In Asia, the heterogeneous mix of fundamental economic drivers as well as divergent effects of COVID are increasingly evident. More advanced economies with fiscal space such as China, Singapore, Korea and Taiwan will be able to maintain aggressive economic stimulus to cushion the debilitating economic effect of the crisis. However, more informal economies and those with a higher proportion of their population below the poverty line such as India, Indonesia and Philippines face significant challenges managing the negative impact of the crisis. These countries suffer from high urban poverty rates, vulnerable healthcare systems and limited social safety nets that are at high risk should the pandemic escalate and containment measures be lifted prematurely. All that stated—and relative to other EM regions such as Latin America, which remains a major viral hotspot—Asia is better poised to weather current economic and medical challenges.

Looking ahead, we expect a recovery in Asia to be led by economies with large domestic consumption bases, though overall consumption is likely to be still muted due to risk aversion. Intra-regional trade, which accounts for 40% of regional trade, will likely be the first driver of a recovery of supply chains, though other major markets will still account for 60% of Asia’s external demand. Even for China, economic growth will be impeded if the

pandemic continues to weigh on its principal trading part-ners (pre-crisis the tradable sector of the Chinese economy represented 38% of GDP).

Key Driverscontinued from previous page

Asia: Diverging Fortunes in the Region

Asia is better poised to weather current economic and medical challenges rela-tive to other EM regions.

We expect an Asia recovery to be led by economies with a large domestic consumption base.

Western Asset Third Quarter 20204

USWe expect a strong economic rebound in Q3 on the back of key service industries (e.g., healthcare and restaurants), following weaker than expected Q2 activity. However, with some social distancing strictures likely to be in place for quite a while, the process of complete recovery from the COVID crisis will take time.

CanadaWe expect Canada’s GDP to sharply decline in Q1 and Q2, but recent activity data is encouraging. The housing market, which may have been par-ticularly vulnerable to income shocks given household debt levels, has benefited from the government’s fiscal programs and is already bouncing back. While Fitch downgraded Canada’s credit rating by one notch, we do not see this as a material event or likely to be followed by others.

EuropeFor 2020, we expect a marked recession, followed by a rebound in 2021.The ECB is increasingly focusing on the PEPP to convey the monetary stance as well as fight the fallout from the COVID pandemic. European fiscal policy is bound to make a significant step forward by creating a sizable pool of supranational safe-haven assets in the context of the recovery fund.

UKWe expect some volatility when trade negotiations with the EU begin. The outlook for monetary policy has become more hawkish, especially as the window for additional QE seems to have closed. Regarding fiscal policy, the government seems to be intent on additional spending but it is unclear whether the pivot to investment (rather than consumption support) will succeed.

JapanWe expect the Japanese economy will recover late in 2020 considering the unprecedented amount of fiscal and monetary policy accom-modation in place. We continue to believe that the BoJ will keep interest rates very low for a long period of time with a steepening bias in the JGB yield curve.

AustraliaThe RBA’s recent yield curve control measures were effective in locking short-end rates in the targeted 0.25% range. The 10-year bond yield ebbed and flowed, closing the quarter in the middle of the 50 bps range as geopolitical issues heightened and COVID-19 cases rose in the US.

EUROPE: We continue to think that the ECB’s asset purchase programs will absorb much of the discretionary fiscal stimulus in response to the pandemic and essentially cap the down-side. With positive policy news flow over the next few months, we expect periphery spreads to remain supported.

UK: We expect a bumpy few months in terms of head-lines, but most outcomes would point to potential GBP weakness over the medium term.

US: We continue to see value in the front end of the yield curve on the view that the Fed will keep rates pinned lower for longer to support economic activity and bolster inflation expectations.

JAPAN: We expect a steeper yield curve, especially at the super-long end of the JGB yield curve as intended by the BoJ.

The Big Picture

Developed Market Rates: Relative Value by Region

CANADA: Provincial and corporate spreads remain wide relative to year-end 2019, but the Bank of Canada’s QE programs have been supportive. 30-year real return bonds remain compelling with breakeven inflation rates at 1.10%, below underlying inflation trends. We remain wary of energy exposure despite the recovery in prices.

AUSTRALIA: Our focus remains on the middle and long end of the curve. We also see value in high grade sectors, such as semi-governments and SSAs, on continued spread compression and reduced supply.

See Relative Value by Sector section for the Emerging Markets outlook.

Western Asset Third Quarter 20205

Investment-Grade(IG) Corporate Credit Outlook Relative Value

US Sector valuations still remain attractive. The technical backdrop is supportive with reduced new-issue supply in the second half of the year and the Fed engaged as a backstop through its asset purchase programs. Fund flows are solidly positive as overseas investors continue to seek yield but with much more favorable FX hedging costs now.

+ Our bias in the near term is to remain overweight, especially through the higher-quality issuers added throughout Q2 as these are the companies with ro-bust franchises, solid balance sheets and the where-withal to survive in challenging environments.

Europe After a strong performance in Q2, spreads look less compelling from a val-uation point of view. Names with little or no exposure to the pandemic are trading near their pre-COVID levels. That stated, central bank bond purchase programs continue to be supportive of Euro IG credit markets.

+/– Credit fundamentals for REITS and financials remain robust and valuations still offer some opportunity. Sterling credit has benefited from a quieter new-is-sue calendar. We are overweight euro and GBP credit.

Australia Without a direct buying program, the Australian corporate market was slower to retrace initially, but the change to repo conditions on credit by the RBA and moves in offshore markets ultimately drove spreads tighter. We expect IG credit to continue to be a strong source of outperformance on continued policy support and investor demand for yield.

– We remain overweight the sector with slightly longer spread duration exposure. While support programs will benefit the economy, we are not expecting a “V-shaped” recovery and therefore are circumspect about overall risk levels.

High-Yield (HY) Corporate Credit

US The resurgence of COVID-19 cases, the ability of the economy to stabilize and the upcoming election season are the main drivers of future market direction. Technicals remain supportive on modest new issue supply, pent-up investor demand and the Fed’s commitment to buy HY securities.

+ In Q2, we took advantage of deeply discounted secu-rities in cruise lines, airlines and retail. We remain over-weight financials, consumer services, and secured airlines. New issuance should continue to provide investment opportunities as terms will be favorable.

Europe Spreads have narrowed during Q2 back to levels consistent with early-2016 and late-2018. Default rates will likely be lower than initially feared and com-panies are proactively improving corporate liquidity. This, plus the increase in economic activity should help risk premiums decline further over time.

+ We prefer corporate hybrids over BB rated issues; in B rated issues and below, we have a preference for defen-sive industries (healthcare, telecom/cable) and compa-nies with ample liquidity in more cyclical industries.

Bank Loans

US The loan market will be driven in the near term by the pervasive demand technicals from CLO issuance, further exacerbated by limited new-issue loan supply and loan repayments causing investors to recycle cash into the sec-ondary market. We expect the loan market to grind higher with continued bifurcation between high quality defensive credits/single B names and con-sumer cyclical/high COVID-risk names.

+ While defensive industries have continued to recov-er, we believe industries such as consumer staple, healthcare and communication offer a better risk/return profile given the uncertainty regarding the length of the economic shutdown.

Collateralized Loan Obligations (CLOs)

US As expected, the IG rated portion of CLOs snapped back in Q2, boosted by a supportive macro backdrop and Fed policy measures. With bank loans recov-ering almost 70% of its March widening, CLO tranches followed suit. Should the recovery timeline extend due to a continuation of this second wave and/or a renewal of broad economic shutdowns, we could see bouts of volatility in lower-rated CLO tranches.

+ AAA CLOs are still more than 60% wide of 2020 tights and offer spread premia over other compa-rably rated products. AAAs will also perform well in either a bearish or bullish scenario. BB and BBB CLOs offer compelling total return at current valuations.

Structured Credit

Agency MBS We are neutral on mortgages based on current valuations and continued sup-port from Fed purchases.

+/– We favor TBA in production coupons and specified pools in higher coupons.

Non-Agency Residential MBS (NARMBS)

While uncertainty surrounding the COVID crisis remains, housing was in a strong position going into the crisis. The response from regulators and the Fed has been swift and effective at preventing a spike in foreclosures and keeping capital flowing into the housing market.

+ We are positive on legacy NARMBS/new-issue re-performing loan deals as many of these borrow-ers have already withstood similar disruptions, (i.e., the GFC and hurricanes) and are proven performers.

Non-Agency Commercial MBS (CMBS)

In near term, we remain cautious as it is uncertain how long it will take for commercial real estate markets to fully recover from the negative impacts of the pandemic. We expect the fundamental outlook to be uneven across prop-erty types and markets as the impact varies by property type and geography.

+/– We are positive on short-duration, well-structured single-borrower securitizations and loans. We pre-fer bonds that can better withstand a period of re-duced operating income.

Asset-Backed Securities (ABS)

We are cautious on consumer fundamentals and watchful of credit perfor-mance on consumer ABS sectors due to the impact of COVID-19 on the econ-omy and the uncertain pace of recovery.

+/– We favor well-protected senior ABS classes from sectors of TALF-eligible collateral such as auto, cards, equipment and student loans.

Relative Value by Sector

continued next page

Western Asset Third Quarter 20206

Inflation-Linked Outlook Relative Value

US Core CPI deflation is now behind us, but the world remains disinflationary. Energy prices are expected to have modest upside through year-end, though significant inventories do represent downside risk. Fed policy will struggle to get inflation to target and anchor inflation expectations.

+ TIPS continue to look attractive to nominal USTsacross the curve. We remain focused on longer-dat-ed breakeven trades. Five-year, 5-year forward BEI at1.5% is 20 bps below pre-COVID level.

Europe Inflation may remain subdued relative to historical levels but should move above the levels implied by the current very low breakeven inflation rates once it become apparent that economic recovery has begun. ECB purchases of index-linked bonds should provide support in the near term.

+ In index-linked and global portfolios, we main-tain exposure to French and Italian real yields andbreakeven inflation spreads.

Japan Japanese breakeven inflation spreads have fallen below 0%. Considering the embedded floor options, Japanese inflation-linked bonds are significantly undervalued. We believe that the undervaluation will be gradually corrected since the MoF as well as the BoJ have increased buybacks in addition to re-ducing issuance.

+ We maintain an overweight in Japanese real yieldsagainst nominal yields.

Municipals

US Reduced economic activity will result in lower tax collections that will drive austerity measures at the state and local levels. The degree of pain on down-stream entities will be on a case-by-case basis, and will ultimately be informed by the length of regional economic shutdowns and the level of federal aid. We anticipate negative headlines and downgrades to be mitigated by strong market technicals, driven by fund flows, crossover buyers and seasonally high coupon and principal reinvestment.

+ We expect higher quality municipals and GO bonds to outperform lower quality and revenue-backedsecurities. In the lower IG revenue-backed seg-ments of the market, we prefer the transportationand healthcare sectors. We expect defaults to re-main subdued and concentrated in the HY segment of the market.

Emerging Market (EM) Debt

EM Sovereigns (USD) The ramifications on EM from coronavirus-related growth impacts and vola-tile oil prices are still not over. Given EM’s limitations to implement significant monetary and fiscal programs versus DMs, the crisis may linger longer. We have already seen an increase in USD sovereign supply to fund necessary fis-cal programs to mitigate further economic damage.

+/– Select IG-rated EM USD-denominated sovereigns remain attractive from both a carry and total re-turn standpoint, but we continue to be vigilant about the potential for fallen angels. HY-rated and Frontier sovereigns are faced with additional downgrades and doubts over their ability to access markets.

EM Local Currency EM external balances continue to improve due to lockdown measures that have constrained imports. EM central banks remain accommodative and will ease further to support economic activity and combat disinflation, despite currency weakness.

+/– We maintain a bias toward local rates while being generally cautious on EM currencies that remain susceptible to virus-induced volatility. With still high real rates relative to DM, we view local rates as a car-ry rather than total return play.

EM Corporates We view EM corporates as being comparatively defensive within the global credit universe given low leverage and conservative balance sheet manage-ment. Unlike EM sovereigns, EM corporates have relatively clean maturity schedules and liquidity positions, which companies have been bolstering with cost cuts, revolver borrowings and opportunistic new issuance.

+/– We are taking advantage of primary issuance from IG and crossover-rated corporates, whose spreads have widened considerably relative to US credit. We are cautious about single B rated EM corporates with cyclical/commodity exposure or domiciles with vulnerability to COVID risks.

Relative Value by Sector continued from previous page

IMPORTANT INFORMATIONPast performance is no indication of future performance.This document is issued by Legg Mason Asset Management Australia Limited (ABN 76 004 835 839, AFSL 204827). The information in this document is of a general nature only and is not intended to be, and is not, a complete or definitive statement of matters described in it. It has not been prepared to take into account the investment objectives, financial objectives or particular needs of any particular person.