Payden & Rygel: Opportunities in the bond market today

14 oktober 2026

A conversation on income, flexibility and the role of an actively managed core bond strategy with Laura Lake, CFA, and Tim Crawmer, CFA.

Bonds once again offer meaningful income, but the Federal Reserve’s renewed focus on inflation and the possibility of further rate increases could keep market volatility elevated.

Laura Lake, managing director and Tim Crawmer, director, are senior strategists at Payden & Rygel, discuss where they see opportunity for investors, why they should stay the course, why selectivity matters and how a flexible core strategy can serve as the anchor of a fixed income allocation.

Key takeaways

• Investors are being paid to own bonds again. Attractive starting yields provide meaningful income and a greater cushion against market volatility than during the long period of low rates.
• Income is the foundation; price appreciation is a potential additional benefit. If inflation moderates and government bond yields decline, investors could also benefit from rising bond prices. The investment case does not depend entirely on that outcome.
• Avoid making the entire portfolio depend on one Federal Reserve forecast. The Payden’s team favors measured interest-rate exposure and multiple sources of return through sector allocation, security selection and duration management.
• The Payden team increasingly favors the front end of the yield curve. It sees attractive starting yields and opportunities to benefit from an eventual change in Fed policy.
• Core bonds should remain an anchor in the portfolio. Their role is to provide income, diversification and stability. Flexibility should help manage risk and capture opportunities without stretching so far for return that the portfolio loses its core characteristics.

With the rise in interest rates and market volatility, should investors rethink their fixed income allocations?

Investors are being paid to own bonds again. All-in yields are attractive, corporate fundamentals remain broadly sound and demand for fixed income is robust. That gives investors a meaningful source of income while they wait for greater clarity on inflation and interest rates.

There is also the potential for more than income. If inflation moderates and government bond yields move lower, investors could benefit from capital appreciation as well. We do not expect the path to be smooth, but the starting yield provides a much better cushion than investors had during the long low-rate era.

We remain constructive on fixed income and credit spread risk, but within US interest rate exposure our preference has increasingly shifted toward the front end of the yield curve. Attractive starting yields, substantial tightening already reflected in prices, and greater sensitivity to any eventual change in Fed policy create a compelling combination.

What role should a core bond strategy play in a portfolio?

We think of core bonds as the anchor of an investor's fixed income allocation. The objective is to provide income, diversification and stability without reaching so far for return that the portfolio no longer behaves like core.

That does not mean the strategy has to be static. A core manager can adjust sector exposure, select individual securities and manage duration while maintaining a risk profile consistent with the portfolio's assignment. Flexibility is valuable, but it should always have a defined purpose.

What does flexibility mean in practice and how does it benefit investors?

The U.S. core bond market offers a broad opportunity set across Treasuries, government agencies, mortgage-backed securities, corporate credit and securitized assets. Those sectors do not move in lockstep, because growth, inflation, rates, credit conditions and new supply affect each of them differently.

We use three principal levers: sector allocation, individual security selection and duration. Historically, we can think of roughly half of realized excess return coming from sector decisions, a quarter from bottom-up security selection and a quarter from interest-rate positioning. The point is to diversify the sources of decision-making rather than rely on one oversized macro call.

Why does the case for active management look different in bonds than in equities?

Fixed income has an asymmetric risk profile. A bond's upside is naturally bounded: investors receive income and, assuming repayment, par at maturity. The downside can be much larger. A bond trading near 100 can fall to 40, 30 or 20 if the issuer experiences a serious credit event.

That makes avoiding uncompensated risk extremely important. An index follows preset rules and generally gives the largest weights to the largest debt issuers. An active manager can ask the more practical question: are we being paid for the risk we are taking?

How should investors think about inflation and Federal Reserve policy?

Inflation remains the pivotal variable because it will influence both the direction of monetary policy and the path of government bond yields. If inflation cools more decisively, bonds could deliver price appreciation in addition to income.

With inflation proving persistent and the possibility of further Fed rate increases, near-term returns may depend more heavily on carry. The lesson is not to make every portfolio decision depend on a single forecast for the Fed.

We prefer a measured duration position rather than a heroic one. Shorter-duration spread assets can generate incremental income and may help offset some weakness in government bonds if rates remain volatile. 

Where are you finding the most interesting relative value?

We currently see attractive opportunities in selected non-agency securitized assets. Many are shorter-duration, floating-rate securities that offer income over front-end Treasuries. But it is not a sector to buy indiscriminately. The investment case depends on detailed analysis of the underlying collateral, the capital structure and how cash flows may behave under stress.

Investment-grade corporate bonds also offer incremental yield over government securities, although tight spreads make security selection increasingly important. We have been willing to move modestly down in quality within carefully chosen spread sectors to capture additional income, while remaining mindful that this is still a core portfolio.

Are agency mortgage-backed securities still attractive?

They are less compelling versus other opportunities but are now more attractive on a relative-value basis after the recent backup in rates. We are not avoiding the sector entirely; we simply see better compensation in some other high-quality areas, including selected investment-grade corporates and non-agency securitized credit.

That illustrates an important point about active management. The question is rarely whether a sector is simply good or bad. It is what that sector is offering relative to the alternatives available today.

How is the increase in corporate issuance affecting the market?

The step-up in issuance, particularly from large technology companies funding artificial-intelligence investment, has attracted attention. A concentrated wave of supply can temporarily pressure prices and widen spreads when several large transactions reach the market at once.

We view that as part of the natural ebb and flow of a healthy primary market. Prices adjust until buyers are willing to absorb the bonds, and demand has remained robust. Borrowers may need to offer slightly lower prices or wider spreads when supply is heavy, but for selective investors those concessions can create attractive entry points rather than signal a structural problem.

What should investors realistically expect from a core bond strategy?

At today's yields, fixed income can once again provide a credible combination of income and potential portfolio protection. There will likely be periods of volatility as markets reassess inflation and the policy outlook, but investors are receiving more income while they wait.

The strongest case for a flexible core strategy is not that it will predict every turn in rates or spreads. It is that every decision does not have to rest on the same forecast. Sector rotation, security selection and duration positioning can provide distinct sources of return and risk control. When the most important variable is also the hardest to call, that disciplined flexibility is exactly what an anchor should provide.

Laura Lake, CFA is managing director and senior portfolio manager at Payden & Rygel. Tim Crawmer, CFA is a director and global credit strategist at Payden & Rygel.