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By Michael Herbst | 02-16-2010 04:03 PM

Gauging the Risk of Rising Rates

Western Asset CIO and manager Steve Walsh says a fairly modest recovery in the U.S. economy followed by a fairly prolonged period of challenged growth doesn't support meaningfully higher rates.

Michael Herbst: Now with the rates having remained at near-historical lows for such a long time, everybody now is thinking about what will happen when rates rise, how quickly they may rise or when they may rise. How does that factor into how the Western Asset portfolios are positioned today, and how do you think that they are equipped, essentially, to navigate a rising rate environment?

Steve Walsh: Well, longer-term history with our funds would demonstrate they can actually perform quite well on a relative basis in a rising rate environment. I would never position Western as a bologna manager, in other words, we only do well when rates are flat or falling. We tend to be able to have pretty active interest rate strategies and can maneuver the fund fairly meaningfully if necessary if we did see a rising rate environment coming.

The way we think about the world is actually we're not as fearful as everyone else is about rising rates, first of all. Our general thought is that the U.S. economy will do pretty well in here, as will the global economy over the course of the next two to three quarters, and after that faces some pretty meaningful challenges, one of those being fiscal that we just talked about. That would have the tendency to dampen growth in the United States. Thus, with the fairly modest recovery in the U.S. economy going on right now, and after that a fairly prolonged time of pretty challenged growth, we don't think the fundamental backdrop supports meaningfully higher rates.

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