Payden Global Government Bond Index Fund

As 2026 gets underway, global markets are adjusting to a late-cycle environment characterised by moderating growth, uneven disinflation, and cautious central banks. January's data broadly supported a "cooling but resilient" global backdrop. Economic momentum slowed from the highs seen in late 2025 but remained intact, whilst inflation continued to ease, albeit unevenly. Policy uncertainty, geopolitics, and trade dynamics played an outsized role in shaping market sentiment, reinforcing a data-driven and scenario-based outlook across asset classes.

In the US, the economy entered 2026 with solid underlying momentum but clearer signs of moderation. Growth remained supported by resilient services activity and steady consumer demand, whilst manufacturing stayed subdued and labour-market cooling became more evident. Jobless claims remained low, pointing to limited layoffs, but hiring slowed, and payroll gains were modest, consistent with easing labour demand. Inflation continued to move gradually towards target, although uneven progress kept the Federal Reserve (Fed) firmly data-dependent and cautious on the timing of any policy easing. Markets were also influenced by political developments, including President Trump's nomination of Kevin Warsh to succeed Jerome Powell as Fed Chair when Powell's term ends in May 2026. This renewed focus on the future policy framework and central bank independence. Financial conditions were further shaped by a softer US dollar during the month, reflecting shifting rate expectations and improved global risk sentiment. The S&P 500 ended the month up 1.37%, whilst the yield on the 10-year US Treasury closed at 4.24%.

European data surprised modestly to the upside, with fourth-quarter GDP growth exceeding expectations and marking another quarter of expansion. The recovery continued to be driven by domestic demand, whilst exports remained a constraint. Inflation trends were mixed: headline readings eased towards target, but core pressures and inflation expectations remained elevated, reinforcing the European Central Bank's patient stance. In the UK, growth remained modest and uneven, with sticky domestic inflation complicating the policy outlook despite signs of a cooling labour market. The yields on 10-year Bunds ended the month at 2.84%, whilst 10-year Gilts closed at 4.52%.

Our outlook for 2026 can be characterised as cautiously optimistic, though risks are skewed to the downside. The US economy remains central to our global outlook particularly given the unusual divergence between strong GDP growth and a weakening labour market, an imbalance we do not expect to persist in 2026. In our view, the US economy faces a binary path: either re-accelerating as technology-driven productivity gains take hold or slipping into recession if labour-market softness begins to weigh more broadly on economic activity. In either scenario, US inflation is expected to continue moderating. This disinflationary trend, combined with labour-market weakness, should allow the Fed to continue easing policy towards neutral, and potentially beyond. Outside the US, most developed economies are likely to remain resilient, supported by benign economic growth, declining inflation, and accommodating, or further easing, monetary policy. Japan stands as an exception, where gradual policy tightening is expected to continue.

Moderating inflation and range-bound inflation expectations have historically been associated with a negative correlation between interest rates and risk assets. With risks to economic growth tilted to the downside, we believe a balanced and diversified allocation between duration and credit risk positions portfolios well to navigate the uncertainty and range of potential outcomes in 2026. Despite the level of macroeconomic uncertainty across the economy, credit valuations remain at the most expensive end of the historical ranges, even as corporate fundamentals appear relatively healthy.

In this environment, we prefer to distribute risk in our portfolios in a more balanced manner across duration and credit. Consistent with our central outlook, we continue to hold modest overweight positions in higher-quality credit sectors, including investment-grade corporates and select high-quality securitised assets.

Given the ongoing concerns around economic growth, we favour an overweight to duration, positioning portfolios to benefit from further declines in interest rates. Within this exposure, we prefer intermediate-maturity US Treasuries and select emerging-market sovereign bonds. We are also positioned to benefit if the gap between short-term and long-term interest rates grows wider (a "steepening" yield curve), especially in the US and Germany, which we believe could provide some protection in an economic slowdown or if fiscal policies become more expansionary.

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.