Payden Sterling Reserve Fund

April unfolded in two distinct phases, initially marked by a relief rally as the partial reopening of the Strait of Hormuz and ongoing negotiations eased supply concerns, prompting a broad repricing across global assets. However, sentiment deteriorated in the latter half as progress toward a lasting resolution proved more complex; oil prices edged higher again, reigniting inflation concerns and pushing rates upward. Despite this uncertainty, risk assets showed resilience, supported by a solid earnings season, even as the macroeconomic backdrop reflected persistent inflation pressures and fragile growth.

In the US, firmer inflation data released during the month, particularly on the headline side, led investors to reassess the Federal Reserve’s (Fed's) reaction function. Whilst core measures remained relatively contained, the strength in energy-driven inflation, alongside resilient activity data, reinforced the Fed’s cautious stance. The advance estimate of first-quarter GDP pointed to a rebound in growth, suggesting the economy continues to absorb tighter financial conditions. Against this backdrop, the Fed left rates unchanged and signalled patience, prompting markets to push out the timing of rate cuts. The S&P 500 ended the month up 10.42%, whilst the yield on the 10-year US Treasury finished at 4.37%.

In Europe, the data pointed to a more challenging mix. Growth remained weak, with first-quarter GDP showing only marginal expansion, whilst inflation surprised to the upside in April, reversing some of the prior progress on disinflation. This dynamic limited the European Central Bank's (ECB’s) flexibility to ease policy in the near term, reinforcing a cautious tone despite the soft growth outlook. In the UK, the Bank of England also held rates steady but highlighted upside risks to inflation, with some divergence emerging within the committee. The yields on 10-year German bunds ended the month at 3.04% and 10-year UK gilts at 5.01%.

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 the economy can absorb elevated energy prices, in line with what we observed in 2023 and 2024, with the most likely outcome being a reacceleration of growth driven 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 will have scope to ease policy later in the 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.