Payden & Rygel

We were too defensive last year but changed our stance early in 2024. Our theme this year is “Believe,” inspired by Ted Lasso. Despite tight spreads and fewer Fed cuts than hoped, we see strength in the corporate market. We’re getting more aggressive to generate alpha this year, as we don’t expect spreads to widen significantly.

Investment grade companies refinance a small portion of their debt each year, so many locked in low rates during the pandemic. Their average borrowing cost has only risen slightly, so they’re managing well. High yield issuers might face issues later, but not immediately. They still have some runway before refinancing at higher rates becomes problematic.

Jeffrey Cleveland, Director and Chief Economist – Payden & Rygel. May 2024

I’m not as excited about inflation cooling off as some of my colleagues and maybe competitors are. We still see a lot of inflation pressure. Looking at median CPI month to month lets you filter through some of the noisy outliers every month. That was still up 0.4 percent in the month of April. So, to me that is a lot of underlying inflation.

I think this means the Fed is at best on hold for the foreseeable future which is critical to point out. The way we’ve been framing what’s moving markets, is that you could think of the different tail scenarios. So, a tail scenario where the economy accelerates, and inflation accelerates doesn’t look like to us that’s what we’re seeing in the data.

Higher yields are attracting more demand from investors. Also, given that equities had a strong year last year, big funds have taken some chips off the table in equities and put them into fixed income. There’s a lot of demand that’s supporting the market. We think government bond yields have the potential to be volatile this year and will dictate the total returns for fixed income broadly.

However, global high yield is a lower duration asset class and will be less impacted by what happens with government bond yields and more impacted by credit quality and how strong the economy is. These things are positive for the market.

Emerging Market Debt (EMD) has continued to develop as an asset class, bringing with it a new subset of countries—EM frontiers. We use three criteria to classify frontier economies—investment credit rating status (high yield), income status, and issuance size. The EMD frontier universe currently consists of 38 economies.

 A discussion on global corporate bond opportunities in this roundtable featuring the Payden and Rygel fixed income team. Participants included Natalie Trevithick, Payden’s Head of Investment Grade Credit Strategy; Timothy Crawmer, Director and Global Credit Strategist; and Frasat Shah, a Senior Vice President in Global Fixed Income. Here are highlights from their conversation. 

The U.S. federal fiscal deficit surged to $2 trillion in 2023 or 7% of U.S. gross domestic product (GDP).1 Put another way, the U.S. Federal Government spent $2 trillion more than it received in revenue during its 2023 fiscal year.

For context, considering the U.S. is not at war or in a recession, the budget gap is enormous. Typically, in economic expansions, budget deficits narrow rather than widen.