Why Today’s Global Bond Market Demands a More Selective Approach

Payden & Rygel’s Eric Souders says today’s bond market rewards selectivity, not simplicity

Fixed income offers some of the most attractive income opportunities in years, but today’s market is also becoming more complex. Economic growth has proven resilient, inflation is moderating only gradually, geopolitical uncertainty remains elevated, and the investment cycle around artificial intelligence is creating increasingly differentiated outcomes across credit markets.

In the following discussion, Eric Souders, CFA, Managing Director and Portfolio Manager for Payden & Rygel’s Absolute Return strategy, explains why disciplined portfolio construction, active credit research and investment flexibility are becoming increasingly important in today’s environment.

Key Takeaways

• Higher yields have expanded the opportunity set, but they have not reduced the need for disciplined risk selection.
• Active credit research is becoming a more important source of value as dispersion across issuers, sectors, and regions widens.
• Diversification today extends beyond the traditional 60/40 portfolio and increasingly depends on combining multiple sources of return.
• Artificial intelligence is becoming both a macroeconomic and credit story, creating differentiated winners and losers across industries.
• Flexible, benchmark-agnostic strategies can adapt as opportunities evolve across global fixed income markets.

Q: Why is fixed income particularly attractive today?

Bond yields are substantially more attractive than they were for much of the period following the Global Financial Crisis. That gives investors the opportunity to earn meaningful income without necessarily taking excessive duration or credit risk.

At the same time, higher yields don’tmake every part of the market equally attractive. In our view, this is an environment where investors should be highly disciplined about the risks they choose to own. Dispersion across sectors, issuers, and regions continues to increase, creating a wider range of potential outcomes.

As dispersion widens, active credit research becomes increasingly valuable. The opportunity is not simply to identify attractive investments, but also to avoid situations where higher yields may not adequately compensate investors for the underlying risks.

Q: Does the traditional 60% equity and 40% fixed income portfolio still provide sufficient diversification?

The traditional 60/40 allocation remains a useful starting point, but investors should not assume it will provide the same degree of diversification that it often did during the 2000s and 2010s.

Much of that period was characterized by a broadly disinflationary environment, where slowing growth was typically accompanied by falling interest rates. That made duration a highly effective diversifier during periods of equity market weakness. Today’s environment looks different. Structural forces, including demographics, more expansionary fiscal policy, geopolitical fragmentation, and significant investment in areas such as artificial intelligence and energy infrastructure, may contribute to inflation that is more persistent and variable than investors experienced over much of the previous two decades.

As a result, diversification increasingly depends on understanding the underlying drivers of portfolio risk rather than simply owning different asset classes or sectors. Many investments can appear diversified while remaining exposed to the same underlying factors.

In our view, effective portfolio construction increasingly requires combining exposures that respond differently across a range of economic outcomes. That may include different sources of duration, credit risk, currencies, geographies, and other return drivers, rather than relying on a single historical relationship to provide diversification.

Q: Where are you currently finding the most attractive credit opportunities?

We continue to find attractive opportunities across selected areas of corporate credit, including parts of the U.S. high-yield market. Credit fundamentals remain generally healthy, overall market quality has improved over time, and we expect default activity to remain relatively contained over the next year or two.

We also continue to see value in selected areas of securitized credit, including commercial real estate, data centers, and multifamily housing.

In Europe, we see attractive opportunities in selected collateralized loan obligations (CLOs). Relative to their U.S. counterparts, European CLOs generally have less exposure to software-related borrowers, an area where we remain cautious, while continuing to offer attractive income and strong structural protections.

Emerging market debt continues to offer diversification benefits, although tighter valuations have led us to reduce exposure relative to 2025 where potential price performance was more evident.

Q: Which areas of the credit market warrant greater caution?

We remain cautious in portions of leveraged finance associated with technology and software. Our concern is less about the sector itself and more about business models where leverage and future cash flow assumptions may prove difficult to sustain in a rapidly evolving competitive environment.

Artificial intelligence is unlikely to affect every company equally. Some businesses will benefit from increased investment and productivity, while others could experience meaningful disruption to revenues or competitive positioning.

That makes issuer-level analysis increasingly important. Investors need to understand how technological change could influence a company’s cash flows, financing requirements, and long-term ability to service debt.

Q: How is artificial intelligence changing the investment landscape beyond equities?

Much of the discussion surrounding AI has focused on equity valuations and the largest technology companies, but we believe its implications for credit markets may be equally important.

The AI investment cycle is increasingly influencing growth, inflation, and capital allocation across the broader economy. Building AI infrastructure requires significant investment in areas such as power generation, data centers, and communications infrastructure, creating financing needs across multiple sectors.

At the same time, AI is creating increasingly differentiated outcomes at the company level. Some firms are investing in productive long-term growth opportunities, while others face greater uncertainty around future business models or competitive positioning.

For credit investors, distinguishing between those outcomes is critical. Bondholders are ultimately underwriting future cash flows and the ability to repay debt, making disciplined fundamental analysis increasingly important as these trends unfold.

Q: What role can an absolute return bond strategy play in an investor’s portfolio?

An absolute return strategy is designed to be flexible rather than constrained by a traditional bond benchmark. That flexibility allows capital to be allocated across government bonds, corporate credit, securitized assets, emerging market debt, and currencies as relative value opportunities evolve.

Our objective is to generate returns above local cash rates while preserving capital over a medium-term investment horizon. Achieving that requires balancing three primary sources of return: credit risk, duration, and currencies.

In today’s environment, we have generally preferred credit risk over duration exposure, while also adding value through sector selection. As market conditions evolve, the flexibility to adjust those exposures can become an important advantage because today’s investment environment does not fit neatly into a single stage of the economic cycle.

Q: What is the most important message for fixed income investors today?

Higher yields have undoubtedly improved the opportunity set. The more important question is how investors choose to capture those opportunities through disciplined risk selection and thoughtful portfolio construction.

In our view, success will increasingly depend on disciplined risk selection, active research, and the flexibility to adapt as market conditions evolve. Attractive income remains available but understanding precisely which risks you own—and why you own them—has rarely been more important.

About Payden & Rygel

Payden & Rygel is one of the largest privately-owned global investment advisers, managing approximately $164 billion in assets. Founded in 1983, the firm specializes in the active management of fixed income and equity portfolios, serving central banks, pension funds, foundations, and corporations worldwide. Headquartered in Los Angeles, the firm also maintains offices in Boston, London, and Milan. For more information, visit www.payden.com.

This material reflects the firm’s current opinion and is subject to change without notice. Sources for the material contained herein are deemed reliable but cannot be guaranteed. This material is for illustrative purposes only and does not constitute investment advice or an offer to sell or buy any security. Past performance is no guarantee of future results.

This material has been approved by Payden & Rygel Global Limited which is authorised and regulated by the Financial Conduct Authority. This material has been approved by Payden Global SIM S.p.A. which is authorised and regulated by CONSOB.