Payden US Core Bond Fund

February was characterised by shifting interest rate expectations and renewed volatility across global fixed-income bond markets. In the US, the policy debate remained dominated by whether inflation had slowed enough for the Federal Reserve (Fed) to resume rate cuts. In Europe, the macroeconomic narrative was clearer: inflation continued to moderate and growth data proved steadier than expected. As a result, the European Central Bank (ECB) kept rates unchanged, though financial markets still anticipate rate cuts over the medium term.

Fixed income markets were driven by the tension between still-elevated inflation and evidence that economic activity is slowing. Consumer spending remained relatively strong, particularly in the services sector, whilst manufacturing surveys continued to signal subdued conditions. The labour market showed further signs of cooling: layoffs remained low but hiring slowed and payroll growth moderated, consistent with a gradual rebalancing of labour demand.

Inflation continued to ease overall, although progress varied across different categories, reinforcing the view that the return to the Fed’s inflation target is unlikely to be smooth. Markets also paid attention to political developments, including discussion about the future leadership of the Fed ahead of the scheduled end of Chair Jerome Powell’s term in May 2026, which has kept investors focused on the longer-term direction of monetary policy. By the end of the month, The S&P 500 had fallen 0.87%, whilst the yield on the 10-year US Treasury stood at 3.94%.

Our outlook remains cautiously optimistic, though risks are tilted to the downside. The US economy remains central to our global outlook in 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 reaccelerating as technology-driven productivity gains take hold or slipping into recession if labour market softness begins to weigh more broadly on economic activity. Regardless of the outcome, US inflation is expected to continue moderating. This disinflationary trend, combined with labour-market weakness, should allow the Fed to continue easing policy towards neutral and potentially beyond. Stickier inflation remains a risk to this central view.

Outside the US, most developed economies appear relatively resilient, supported by moderate economic growth, declining inflation, and accommodating or easing monetary policy. Japan stands as an exception, where gradual policy tightening is expected to continue. Moderating inflation and range-bound inflation expectations have historically been associated with a negative correlation between interest rates and risk assets. With economic growth facing more downside risks, we believe portfolios with a balanced and diversified allocation between duration and credit risk should be better positioned to navigate the uncertainty and range of potential outcomes in 2026.

Despite the uncertain economic backdrop, credit valuations remain on the most expensive end of the historical range, even as corporate fundamentals appear relatively healthy. In this environment, we prefer to distribute risk in our portfolios in a more balanced manner across duration and credit. Consistent with our outlook, we maintain modest overweight positions in higher-quality credit sectors, including investment-grade corporates and select high-quality securitised assets.