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. 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’t make 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 US 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 centres, and multifamily housing.
In Europe, we see attractive opportunities in selected collateralized loan obligations (CLOs). Relative to their US 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: How is artificial intelligence changing the investment landscape beyond equities?
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?
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?
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.
