Payden Global High Yield Bond Fund

May was a round-trip month for markets, driven primarily by developments in the Middle East. Investor sentiment oscillated between hopes for a US–Iran peace agreement and concerns that the conflict could re-escalate. Late in the month, reports of a proposed 60-day extension of the ceasefire revived the relief trade. Brent crude fell 19.3%, its largest monthly decline since March 2020, easing stagflation fears and helping propel a broad rally across risk assets.

In the US, the Court of International Trade ruled the 10% global tariff under the Trade Act of 1974 unlawful. April economic data initially came in stronger than expected. Headline Consumer Price Index (CPI) accelerated to 3.8% year over year, core Personal Consumption Expenditures (PCE) inflation rose to 3.3%, and nonfarm payrolls increased by 115,000, well above expectations of 65,000. Minutes from the May Federal Open Market Committee (FOMC) meeting indicated that most participants were open to policy firming if inflation remained persistently above 2%, with many calling for the Federal Reserve (Fed) to drop its easing bias. The 30-year US Treasury yield hit a post-2007 high of 5.18% on 19 May before improved risk sentiment pulled yields back. The 10-year US Treasury closed at 4.44%, and the S&P 500 rose 5.15% over the month.

Europe faced the same inflation problem. Annual euro area inflation climbed to 3% in April, the highest reading since September 2023, with preliminary May data releases in France, Italy, and Spain also surprising to the upside. The eurozone composite Purchasing Managers’ Index (PMI) fell to 47.5, its lowest since October 2023. UK politics added pressure: the 10-year gilt yield reached a post-2008 high of 5.19% on 15 May as the Labour party suffered local-election setbacks, whilst the 10-year bund yield also peaked at 3.19% later in the month. Both rallied back as inflation fears eased. April UK CPI came in softer than expected at 2.8%, scaling back Bank of England (BoE) tightening expectations. German Bunds closed at 2.94% and gilts at 4.81%.

The conflict in Iran remains at the forefront of investors’ attention, with market sentiment continuing to be driven by developments in the Middle East. Despite a willingness from both sides to negotiate, a resolution has been elusive. Uncertainty surrounding the conflict’s trajectory and its impact on energy markets continues to add complexity to an already challenging macroeconomic environment. The primary macroeconomic risk stems from the possibility of a prolonged disruption to energy flows through the Strait of Hormuz, a critical chokepoint through which roughly 20% of global oil supply transits. Whilst we expect tensions to moderate over time, the pace of de-escalation will be key for structural energy market pricing.

Despite these risks, our macroeconomic outlook remains relatively optimistic with risks tilted to the downside. The US economy remains central to our global outlook for 2026. We believe it will be able to absorb elevated energy prices, in line with what we have observed in 2023 and 2024, with the most likely outcome being a reacceleration of growth driven in part by technology-led productivity gains. We continue to expect US inflation to moderate, although elevated energy costs have delayed the timeline, and we believe the Fed is likely to be on hold this year and have scope to ease policy next year. Stickier inflation nonetheless remains a risk to this central view.

Outside the US, most developed economies are expected to remain resilient, supported by moderate growth and declining inflation, with Japan representing a notable exception as gradual policy tightening continues. That said, the conflict in the Middle East introduces upside risks to inflation in Europe, where the effects are likely to be amplified by the continent’s reliance on energy imports.

We favour a long-duration position in portfolios, particularly at the front end of the US curve, as well as in select emerging markets. However, given the potential upside risk to inflation expectations, we aim to retain flexibility to add to these positions should pricing become more attractive. Credit valuations have reversed much of the weakness experienced in March and remain near the most expensive end of the historical range. We also believe dispersion across and within sectors could increase, which emphasises the need for diversification and strong bottom-up fundamental analysis.

Given our central views, we maintain modest overweight positions across credit sectors, with a bias towards higher-quality sectors such as investment-grade corporates or higher-quality securitised assets. Alongside our long-duration theme, we prefer positioning portfolios for steeper curves, particularly in the US and Germany, which we believe could provide protection in an economic slowdown or in an environment of more expansionary fiscal policy. In our currency strategy, we hold an underweight position in the US dollar, although less pronounced than earlier in 2025. This positioning is expressed against a diversified basket of developed- and emerging-market currencies such as the euro, the Japanese yen, and the Brazilian real.