Global bond markets are entering a markedly bifurcated phase, with the U.S. Federal Reserve (Fed) easing while other major central banks lean toward further tightening, according to Eric Souders, portfolio manager, Payden & Rygel, who believes that emerging markets are in a stronger position than developed economies because of this.
Following last Thursday’s widely anticipated Fed rate cut, Souders says the bigger question is how quickly further rate cuts will follow.
“The market priced and called the cut last week and has predicted two more over the next 12 months. Our view is actually closer to four or five cuts,” he said. “We think inflation will continue to move lower, particularly as shelter inflation eases.”
Souders described the U.S. economic backdrop as “highly bifurcated”, reflecting a mix of cooling income-driven growth and strong structural tailwinds.
Labour markets have softened, wage growth has slowed, and household consumption has normalised, reducing some of the forces that powered economic momentum over the past two to three years. At the same time, U.S. GDP growth has become narrower, with technology-related investment accounting for roughly half of economic growth in recent quarters.
Souders notes that solid balance sheets, low debt levels, and growing AI-driven investments are helping to keep the outlook positive.
“The left tail is a function of the income driven cycle that drove growth for the last two to three years and has effectively come to an end now. The labour market has cooled, and wages have slowed”, he said.
“Now we lean toward the right tail, with more capex and productivity gains driven by AI innovation. We expect trend-like growth in the coming quarters, around 1.5 to 2 per cent, supported by healthy balance sheets, elevated asset prices, a small fiscal impulse, and an increase in capex heading into 2026.”
Souders believes that the divergence between the U.S. and the rest of the world is where the opportunities are emerging. While markets expect the Fed to continue easing, developed-market central banks appear largely finished cutting, or even considering further tightening.
“Emerging markets have done a much better job containing inflation over the last two to three years, hiking early and protecting their currencies. Rates are now elevated, giving emerging market central banks far more room to cut than in developed markets”, he said.
“As a result, we are more inclined to take interest-rate exposure outside the U.S., particularly in emerging markets where inflation is contained, growth is stable, and policymakers have greater scope to ease.”
Souders also highlighted the growing disconnect between solid fundamentals and stretched valuations across risk assets.
Equity multiples, like the S&P 500 trading at around 25x forward earnings, and high-yield bond spreads at bottom-decile levels, are more consistent with early-cycle expansions than a late-cycle environment.
“It’s difficult to argue that risk assets are cheap,” he said. “Valuation is a poor timing tool, but the asymmetry doesn’t look great. We’re focused on building yield and carrying that into portfolios without taking unnecessary price risk.”
