BEYOND U.S. SUBPRIME WOES: PAYDEN LOOKS TO THE NEW DRIVERS OF GLOBAL FINANCIAL MARKETS

Los Angeles, July 2, 2007 – “The firm is a proponent of a larger global convergence trend” says Kristin Ceva, Payden & Rygel principal and co-portfolio manager of the Emerging Markets Bond Fund (PYEMX), “and we believe that so-called “risky” assets like emerging market and high yield debt are benefiting from bigger-picture global financial trends.”

Over the past few weeks, financial markets have been focused on U.S. subprime mortgage defaults, and potential contagion effects on broader credit markets. Many uncertainties remain about CDOs using subprime loans and about hedge funds that invest in these assets, as underscored by the recent Bear Stearns debacle. Despite the volatility that this may cause for U.S. financial assets, Payden & Rygel believes that there are much bigger global forces at work that will provide support to credit markets in the long run. As one of the first global bond managers, Payden & Rygel recognized the trend toward broad convergence of global bond yields early on.

The most important new force in global financial markets today is the emergence of sovereign wealth funds (SWFs). Twenty-five countries, including nations as diverse as China, Norway, Singapore, and Russia, have set up these state-run funds to invest their growing foreign exchange reserves and savings. Morgan Stanley has estimated current SWFs at a total of US$2.5 trillion as compared to US$1.6 trillion in the hedge fund industry. They also project that SWFs could well surpass central bank reserves in a few years, growing to US$12 trillion by 2015. This global group of SWF countries could continue to be the most important buyers of bonds and equities which include so-called “risky” assets such as high yield and emerging markets. This rapid rise in sovereign funds underscores a shift in financial power away from the U.S. and toward a new class of creditor nations across the globe.

Massive trade and current account surpluses are fueling the rapid growth in reserves around the world. Many countries are flooded with cash from oil, base metal and agricultural commodity windfalls. In this commodity cycle, exporters are saving their windfalls to a much greater degree than in the past. However, the growth in SWFs is not a function of the level of oil prices. Asian countries (largely oil importers) hold 63% of total world revenues and are increasingly joining the SWF trend of diversifying their reserve assets.

As China and other countries see mounting levels of foreign exchange reserves, these SWF governments have realized that they have enough money in U.S. Treasuries and other liquid securities to weather any unforeseen economic crisis. They feel a fiduciary duty to make higher returns, and are now prepared to place at least some part of their reserves in higher-yielding, less liquid assets. China’s recent deal with Blackstone is a harbinger of things to come, signaling their willingness to actively manage reserves and gradually take on more risk. Even long-established funds such as Norway’s US$300 billion SWF are beginning to adopt more risk, recently announcing an increased exposure to global equities. There has been speculation about Japan possibly establishing a sovereign wealth fund to better manage its US$ 880 billion in official reserves.

About Payden & Rygel
Payden & Rygel Global Ltd., was established in London in 1999, manages more than $12 billion in a broad array of strategies in the equity and fixed income markets. The firm has experienced strong growth, serving institutional clients in the UK, Continental Europe and the Middle East. The firm’s exclusive institutional client base includes banks, supranationals, government institutions, pension funds, insurers, foundations and public funds.

The firm is a wholly-owned subsidiary of Payden & Rygel (payden.com), one of the largest privately-owned global investment managers with more than $50 billion in assets under management. Headquartered in Los Angeles, the firm has offices in London, Dublin, Frankfurt, and Hong Kong.