Payden Absolute Return Bond Fund

Markets adopted a more defensive tone in February as volatility increased across both equity and credit markets. Interest rates rallied across the US Treasury curve, largely ignoring robust economic data that continued to surprise to the upside. Instead, the move reflected rising geopolitical uncertainty and growing debate around the potential disinflationary implications of rapid artificial intelligence (AI) adoption. As sentiment shifted, risk assets began to reprice. In contrast to January’s tightening trend, credit risk premiums increased across most sectors. The adjustment was most pronounced in leveraged loans, particularly among issuers perceived as vulnerable to AI-driven disruption. Lower-quality corporate credit broadly underperformed, whilst investment-grade credit and higher-quality structured assets proved comparatively resilient, though not immune to increasing credit risk premiums. Altogether, February marked a recalibration of risk appetite following an extended period of tight valuations, with greater dispersion across asset classes and markets demanding increased compensation for credit and cyclical exposure.

We see a divided path ahead for the US economy, with early-, mid-, and late-cycle dynamics coexisting. Meaningful upside and downside outcomes remain possible, largely driven by the trajectory of the labour market, growth momentum, and inflation dynamics. In this environment, we remain disciplined with respect to downside risk whilst emphasising yield optimisation through relative-value positioning and security selection.

Consistent with this framework, US interest rate pricing suggests a "soft landing," with expectations that the federal funds rate will ultimately settle near 3% and that inflation will remain contained. We remain constructive on the short- and intermediate-maturity segments of the US Treasury curve, where yields appear more stable and offer attractive income relative to longer-duration bonds, which remain more exposed to supply dynamics and policy uncertainty.

Within credit, selectivity remains paramount. We continue to favour an elevated allocation to emerging-market debt, where attractive real yields, moderating inflation, and improving policy credibility provide supportive fundamentals. In developed markets, positioning remains measured, with a preference for higher-quality securitised credit. At the margin, we have selectively increased exposure to higher-quality leveraged loans and high-yield bonds that we believe are relatively insulated from AI-driven disruption and positioned to benefit from the ongoing capital expenditure cycle.

Overall, we believe this approach balances income generation, quality, and price risk, whilst preserving liquidity and portfolio flexibility.