Western Asset Global High Income Fund : Fixed Income Market Commentary

4Q 2022

Investment Highlights

Western Asset Fixed-Income Market

Key Takeaways

• Risk assets and bond yields traded in a wide range, but ultimately risk assets rose and bond yields were mostly higher. Risk sentiment was boosted by lower-than-expected inflation prints as well as prospects for a slower pace of rate hikes and an eventual pause in 2023.
• US inflation moderated during the quarter and generally surprised lower versus consensus forecasts, which further reinforced market expectations that inflation has peaked.
• The FOMC slowed the pace of rate hikes for the fed funds rate from 75 bps in November to 50 bps in December to end the year at a target range of 4.25%-4.50%.

Market Review

During the fourth quarter of 2022, risk assets and bond yields traded in a wide range, but ultimately risk assets rose and bond yields were mostly higher as the Federal Reserve (Fed) continued to hike rates. Risk sentiment was boosted by lower-than-expected inflation prints as well as prospects for a slower pace of rate hikes and an eventual rate pause in 2023. Oil prices fluctuated as global growth expectations adjusted while credit spreads tightened and the S&P 500 rose.

US inflation moderated during the quarter and generally surprised lower versus consensus forecasts, which further reinforced market expectations that inflation has peaked from elevated levels earlier in the year. In year- over-year (YoY) terms, headline Consumer Price Index (CPI) decelerated to 7.1% in November, from 8.2% in September, and well off the June peak of 9.1%. Core CPI-excluding food and energy components-decelerated to 6.0% YoY, down from the 40-year high of 6.6% in September. Other economic data points showed some signs of moderation. Notably in November, the US Purchasing Managers' Index (PMI) for manufacturers contracted for the first time since 2020. US employment data were mixed, as the unemployment rate ticked higher to 3.7% in November from 3.5% in September. Nonfarm payrolls for November saw 263,000 jobs added, which-although coming in above consensus forecasts-was the lowest number of jobs added since April 2021.

As inflation and economic activity showed signs of moderation, Fed officials signaled a need to slow the pace of rate hikes. As had been widely expected, the Federal Open Market Committee (FOMC) hiked the fed funds target rate during the quarter by a total of 125 bps, slowing the pace of rate hikes from 75 bps in November to 50 bps in December to end at a target range of 4.25%-4.50%. The Fed's more balanced tone was supported by the November FOMC minutes, which stated that "a substantial majority of participants judged that a slowing in the pace of increase would likely soon be appropriate." The Fed also released its December Summary of Economic Projections (SEP), which showed some adjustments from its September projections. On balance, the SEP pointed toward a restrictive level for the fed funds rate, declining inflation over the coming year, but also toward slower GDP growth and higher unem- ployment. The Fed's dot plot shifted higher from September, with the median FOMC member expecting that it would be appropriate to hike

the fed funds rate further in 2023, to end the year at 5.10%, up from 4.60% projected in September. The dot plot projected lower year-end fed fund rates in 2024 and 2025, at 4.10% and 3.10%, respectively. Core Personal Consumption Expenditures (PCE) inflation was projected to decline from 4.8% in 2022 to 3.5% in 2023. The projected 2023 unemployment rate was revised to 4.6% from 4.4%, while GDP growth expectations were marked lower to 0.5% from 1.2%.

Outside of the US, most global central banks also slowed the pace of interest rate hikes. Similar to the Fed, the European Central Bank (ECB) and Bank of England (BoE) raised their key rates by a total of 125 bps-in75-bp and 50-bp increments across two meetings-to 2.00% and 3.50%, respectively. In December, ECB President Christine Lagarde delivered a somewhat hawkish message, stating that it would be "obvious to expect more 50-basis-point hikes," while two members of the BoE's Monetary Policy Committee dissented in favor of "no change," which leaned dovish relative to market expectations. The ECB also announced that it would begin quantitative tightening in March 2023. Elsewhere, the central banks of Canada and Australia hiked their policy rates by 75 bps and 100 bps, respectively, but by smaller magnitudes than in the previous quarter, citing the detrimental impact on economic growth and the lagged impact of rate hikes. In contrast, the Bank of Japan (BoJ) surprised markets in December by unexpectedly easing its yield curve control (YCC) target, widening the band around zero for 10-year bonds from 25 bps to 50 bps. In China, as expected, President Xi Jinping was confirmed for a third term during the 20th National Party Congress. In a surprise move, China's COVID-19 restrictions were substantially eased despite new case numbers rising sharply. Officials also put an emphasis on policies that will support growth, which could entail further monetary policy accommodation.

During the quarter, corporate credit spreads tightened, while structured product spreads were mixed. USD-denominated emerging market (EM) bond spreads tightened, while EM local yields fell. The S&P 500 rose 6.6% while WTI oil remained at around $80/barrel. The US dollar weakened versus both DM and EM currencies. Over the quarter, US Treasury (UST) yields were mostly higher with the front-end and very long-end yields rising, while intermediate yields slightly fell. Most yield curve segments

Western Asset Fixed-Income Market

remained inverted with the 2s-10s segment bear-flattening from -39 bps to -53 bps, though the 5s-30s segment steepened modestly from -23 bps to -11 bps. 2-year UST yields rose from 4.22% to 4.41%, 5-year yields fell from 4.06% to 3.99%, 10-year yields rose from 3.83% to 3.88% and 30-year yields rose from 3.79% to 3.97%.

Outlook

In our view, the key to an improved tone and more stability in fixed- income markets is a moderation in inflation. Our base case is that supply chains will slowly begin to normalize. This trend, combined with the Fed and other major central banks around the world tightening monetary policy, along with negative real incomes slowing consumption, should see inflation moderate. We believe inflationary pressures have likely peaked in the middle of 2022 and are set to decline further into 2023. While global central banks are expected to raise interest rates further in the short term, we believe more aggressive action is already anticipated by the markets.

Fundamental headwinds to global growth and inflation remain. These include the reduction of global fiscal stimulus, the withdrawal of monetary policy accommodation and the persistence of secular-related headwinds such as global debt burdens, aging demographics and technology dis- placement. As growth and inflation moderate and the risks surrounding central bank policy become more balanced, so too should the market environment for fixed-income investors. Not only may the rise in government yields abate, but lower volatility could also lead investors to reen- gage in fixed-income spread sectors, especially given current valuations. Going forward, we believe Western Asset's Broad Market strategies must be built to withstand further market volatility, yet be flexible enough to capture value opportunities as they appear.

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Western Asset Fixed-Income Market

Risk Disclosures

Past performance is no guarantee of future results. Please note that an investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges. Fixed-income securities involve interest rate, credit, inflation, and reinvestment risks; and possible loss of principal. As interest rates rise, the value of fixed-income securities falls. International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets. Asset-backed,mortgage-backed or mortgage- related securities are subject to prepayment and extension risks. High yield bonds are subject to greater price volatility, liquidity, and possibility of default.

The Consumer Price Index (CPI) tracks prices for a basket of more than 80,000 goods and services.

Core Personal Consumption Expenditures (PCE) refers to the PCE Price Index excluding food and energy. The core PCE price index is closely watched by the Federal Reserve as it conducts monetary policy.

COVID-19 is the World Health Organization's official designation of the current coronavirus disease.

The Federal Open Market Committee (FOMC) consists of twelve members-the seven members of the Board of Governors of the Federal Reserve System; the president of the Federal Reserve Bank of New York; and four of the remaining eleven Reserve Bank presidents, who serve one-year terms on a rotating basis.

The Federal Reserve Board ("Fed") is responsible for the formulation of policies designed to promote economic growth, full employment, stable prices and a sustainable pattern of international trade and payments.

Gross domestic product (GDP) is an economic statistic that measures the market value of all final goods and services produced within a country in a given period of time.

A mortgage-backed security (MBS) is a type of asset-backed security that is secured by a mortgage or collection of mortgages.

The S&P 500 Index is an unmanaged index of 500 stocks that is generally representative of the performance of larger companies in the U.S.

Spread refers to the difference between Treasury securities and non-Treasury securities of similar maturity but different credit quality.

Summary of Economic Projections are released by the Federal Reserve four times a year. SEP features the Federal Open Market Committee (FOMC) participants' projections for GDP growth, the unemployment rate, inflation and the appropriate policy interest rate.

U.S. Treasuries are direct debt obligations issued by the U.S. government and backed by its "full faith and credit." The U.S. government guarantees the principal and interest payments on U.S. Treasuries when the securities are held to maturity.

West Texas Intermediate (WTI) is a popular oil price benchmark. It is the underlying asset in the New York Mercantile Exchange's oil futures contract.

The yield curve shows the relationship between yields and maturity dates for a similar class of bonds.

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Any information, statement or opinion set forth herein is general in nature, is not directed to or based on the financial situation or needs of any particular investor, and does not constitute, and should not be construed as, investment advice, forecast of future events, a guarantee of future results, or a recommendation with respect to any particular security or investment strategy or type of retirement account. Investors seeking financial advice regarding the appropriateness of investing in any securities or investment strategies should consult their financial professional.

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INVESTMENT PRODUCTS: NOT FDIC INSURED • NO BANK GUARANTEE • MAY LOSE VALUE

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Fourth Quarter 2022