Payden & Rygel: Leveraging volatility in the global bond market
Uncertainty and volatility have risen, which creates opportunities in global bonds
- Yields are attractive, down a bit from 2023 levels, but currently around the higher end of the range we’ve seen in the past two decades.
- Higher yields provide a cushion against market risk. If inflation remains tame and rates decline, global bond total returns will rise. But if inflation accelerates and rates go up, the interest component provides a good cushion against declining bond values.
- As uncertainty rises, performance diverges across geographic regions, creating opportunities for active managers.
- We continue to expect favorable macro conditions and moderate inflation in 2025, though it has become less comfortable to hold that view right now than it was a few months ago. The main risk is the unpredictability of the new administration.
Uncertainty continues to roil markets
The threat of trade war, the impact of strict immigration enforcement, and reductions in government services all create uncertainty. The ramifications for growth and inflation could be significant, but until the situation clarifies, we won’t know what those consequences will be.
Portfolio strategy
- Diversification is especially important during periods of heightened risk. This is not the time to make outsized bets.
- We are investing across developed country corporate bonds, higher-quality securitized assets, and some parts of the emerging markets universe.
- We remain bullish on higher quality credit, though we manage risk by emphasizing liquidity and diversification.
- Bonds in the US, the UK, and some parts of emerging markets including Thailand and Mexico offer attractive all-in yields, especially in the front end of the curve.
- We’re emphasizing shorter over longer duration securities, given heightened uncertainty.
- We’re avoiding sectors with outsized exposure to tariff policy, such as automotives and energy.
- We continue to like the banking and financial sector given their strong balance sheets and diversified exposure. Banks could also benefit from higher rates driving increased net interest income. We also remain positive on some parts of the real estate sector, though not as strongly as in 2024.
Investment flows
We are already seeing some flows out of the U.S. and into Europe. Higher yields in Europe, combined with greater uncertainty in the U.S. may accelerate this trend, reversing some of the inflows U.S. markets have seen over the past decade.
Strong issuance driven by Europe
We expect increased issuance in 2025, led by European government issuers who will have to fund new costs for infrastructure and defense. Issuance will vary significantly between markets, which will create opportunities for active managers.
An attractive entry point.
Returns have converged across global markets in recent years, but 2025 should see increased dispersion. As a global bond manager, we want divergence across regions and sectors. And this is what we are seeing so far in 2025. So again, the global bond market is alive and full of opportunities, offering a good entry point for investors.
