Payden Global Inflation-Linked Bond Fund

March was dominated by an abrupt energy shock and the resulting repricing of global rates. The month began with bond markets selling off as the war in the Middle East and disruption around the Strait of Hormuz sent oil prices sharply higher, reviving inflation concerns and pushing investors to scale back rate-cut expectations. Risk assets struggled through most of the month before stabilising into month-end as hopes of de-escalation emerged.

In the US, markets were shaped by a cooling labour market and persistent inflation. February non-farm payrolls fell by 92,000, and unemployment rose slightly to 4.4%, indicating weaker labour market conditions; however, producer-level inflation data releases suggested that underlying price pressures remain firm. Against this backdrop, the Federal Reserve (Fed) left rates unchanged at 3.50%-3.75%, describing activity as still expanding at a solid pace and inflation as “somewhat elevated.”

The closure of the Strait of Hormuz and resulting spike in energy prices further complicated the outlook, triggering a sell-off in US Treasuries and a repricing towards fewer and later rate cuts. In the last days of the month, rates saw some stabilisation as investors weighed the potential growth drag from higher oil prices. The S&P 500 ended the month down 5.09%; whilst the yield on the 10-year US Treasury closed at 4.32%.

The euro area began the month with modest growth and declining unemployment, but a sharp spike in energy prices has increased inflation risks and challenged the recovery narrative. Fourth-quarter GDP was confirmed at 0.2% quarter-on-quarter, whilst unemployment declined to 6.1%, signalling limited but positive economic momentum. However, elevated energy costs have driven inflation expectations higher, reflecting Europe’s particular sensitivity to such shocks. The European Central Bank (ECB) maintained a cautious stance, citing the dual risks of renewed inflationary pressure and weaker economic activity.

In the UK, the February Consumer Price Index (CPI) remained at 3.0%, and the Bank of England held the policy rate at 3.75%, noting that the energy shock is likely to raise near-term inflation. Ten-year German bund yields ended the month at 3.00% whilst ten-year UK gilt yields stood at 4.91%.

The conflict in Iran dominated investor attention in March and is likely to remain a key driver of sentiment, with uncertainty persisting despite comments from the Trump administration that the military campaign could conclude within weeks. The principal macroeconomic risk is a prolonged disruption to energy flows through the Strait of Hormuz, a critical chokepoint for about 20% of global oil supply, which would further strain an already fragile environment.

Despite these risks, our macroeconomic outlook remains cautiously optimistic, with risks tilted to the downside. The US economy remains central to our global outlook for 2026. We believe the current divergence between strong GDP growth and weakening labour markets in the US is unusual and unlikely to persist. In our view, the US economy faces a binary path: either growth re-accelerates as tech-driven productivity gains take hold, or the economy slows towards recession if labour market weakness spreads. In either case, we expect US inflation to continue moderating, allowing the Fed to continue easing at least to neutral and potentially beyond. However, persistent inflation remains a key risk particularly in light of recent developments in the Middle East. Outside the US, most developed economies are expected to remain resilient, with modest growth and easing inflation. Japan is the main exception, where gradual policy tightening is likely to continue. In Europe, however, the conflict in the Middle East presents an added inflation risk, given the continent’s heavy reliance on energy imports.

Moderating inflation and stable inflation expectations should be consistent with negative correlations between interest rates and risk assets. With growth risks tilted to the downside, a balanced and diversified allocation across duration and credit appears well-positioned to navigate uncertainty and a wide range of potential outcomes in 2026. The conflict in Iran is a direct threat to our inflation view, and we are mindful of these risks for the time being. Whilst credit valuations have become somewhat more attractive, they remain elevated relative to historic levels. Greater dispersion across and within sectors emphasises the importance of diversification and strong bottom-up analysis.

Against this backdrop, we prefer to distribute risk in our portfolios in a more balanced manner across duration and credit. We maintain modest overweight positions in higher-quality credit sectors, including investment-grade corporates and select high-quality securitised assets. We also favour greater exposure to duration, positioning portfolios to benefit from further declines in interest rates. Within this allocation, we prefer intermediate-maturity US Treasuries and select emerging-market sovereign bonds. We are also positioned to benefit if the gap between short-term and long-term interest rates grows wider (a "steepening" yield curve), especially in the US and Germany, which we believe could provide some protection in an economic slowdown or if fiscal policies become more expansionary.

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.