TODAY’S CHALLENGE
CPI: 2.9% in December 2024*
A resilient U.S. economy and a proactive Federal Reserve create potential opportunities in fixed income markets.
CPI: 2.9% in December 2024*
50+ years of fixed income investing
OUR STRATEGY
50 years of fixed income investing
Capital Group offers bond funds to help investors generate meaningful income. Our research-driven, active approach allows for allocations to shift based on market conditions and investment insights (subject to fund guidelines).
*Source: Bureau of Labor Statistics. The U.S. Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.
OUR TAKE
On a historical basis, opportunities for high income should continue if the U.S. economy maintains its strength.
For investors willing to add risk, allocations to multisector, high yield or emerging markets debt funds can complement core funds and help provide income.
Income-seeking funds offered higher distributions, complemented core (F-2 shares)
AHMFX's tax-equivalent 30-day SEC yields (gross/net) for the F-2 share class at the highest federal tax rate were 6.96%/6.96% as of 1/31/25.
*Tax-equivalent 12-month distribution rate: Highest tax rate assumes the 3.8% Medicare tax and the top federal marginal tax rate for 2025 of 37%. Morningstar Intermediate Core Bond and Morningstar Intermediate Core-Plus Bond are category averages. Sources: Morningstar. Bloomberg.
American Funds Multi-Sector Income Fund (F-2)
MIAYX
American High-Income Trust (F-2)
AHIFX
American Funds Emerging Markets Bond Fund (F-2)
EBNFX
American High-Income Municipal Bond Fund (F-2)
AHMFX
Featured fund: American Funds Multi-Sector Income Fund
American Funds Multi-Sector Income Fund invests across higher income sectors. The fund is designed to provide less volatility than a standalone high-yield or emerging markets debt fund, without meaningfully reducing income.
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Positioning
Fund tilted toward higher quality sectors
Monthly allocations since fund inception (March 22, 2019)
Opportunistic includes U.S. Treasuries, municipal bonds, noncorporate credit and other debt instruments. Securitized includes financial securities that are created by securitizing individual loans (debt). Source: Capital Group. Data as of 12/31/24. Investment-grade = BBB/Baa and above.
Overweight
Securitized
Our largest overweight remains securitized credit. The commercial mortgage-backed securities portion within securitized credit is diversified across conduit and single-asset/single-borrower holdings. Meanwhile, our largest asset-backed securities position is in subprime auto and rental cars.
Investment-grade credit
We believe that investment-grade corporates still provide idiosyncratic opportunities even as valuations remain near cycle tights. Attractive all-in yields and strong fundamentals have driven strong demand and supported current valuations. We remain focused on higher quality issuers and a handful of idiosyncratic credit opportunities.
Underweight
High yield
The portfolio’s allocation to high-yield remains relatively unchanged compared to recent periods with about 30% of the portfolio allocated to the sector. We remain constructive on U.S. high yield in 2025. In addition, we expect default rates to remain below their historical average, though some sectors (such as healthcare, defense and telecom) and specific issuers may experience a wider range of outcomes.
Emerging markets
The portfolio maintains a relatively neutral allocation to emerging markets debt (EMD) as we believe that the recent easing in U.S. monetary policy has improved the sector’s outlook. On a relative value basis, the portfolio slightly favors below-investment-grade sovereign bonds over higher quality EMD sovereigns and comparable high-yield corporates.
Weightings are relative to the American Funds Multi-Sector Income Fund Custom Index. As of 12/31/24.
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Strategy
Credit selection remains key – Stable fundamentals support current valuations
- Over the quarter, credit valuations were tighter overall following the outcome of the U.S. presidential election, but the risk-on sentiment weakened going into the end of the year as the outlook for future rate cuts has softened.
- The fund's asset allocation remained consistent over the quarter, demonstrating the portfolio management team's sustained optimism in the economic outlook. This stability in asset allocation reflects a strategic decision to maintain a balanced portfolio amidst varying market conditions.
- Overall, we expect global growth to remain positive, driven by consumer spending, steady corporate earnings, and supportive fiscal policies. However, it is important to note that this growth may slow down compared to recent quarters due to potential headwinds such as geopolitical uncertainties and uncertain monetary policies. Despite these challenges, our outlook remains cautiously optimistic, with a focus on long-term growth opportunities.
Source: Capital Group. As of 12/31/24.
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Featured fund: American High-Income Trust
A diversified portfolio of lower rated, higher yielding bonds seeking to provide you with a high level of current income
Fund is slightly defensively positioned as growth moderates
Industries shown below are among the fund's notable overweights and underweights relative to the index
Sources: Capital Group, Bloomberg. Data as of 12/31/24.
Overweight
Energy
The sector's credit quality and cash flow have improved following two recent default cycles in 2015 and 2020. Fundamentals remain attractive against a backdrop of continued domestic and global economic growth.
Brokerage, asset managers & exchanges
Financial advisory platforms are growing via consolidation and should benefit from higher interest rates. Investments across the sector have produced an attractive level of cash flow despite recent concerns about cash sweep considerations.
Underweight
Consumer cyclical
Although the fund remains broadly underweight the sector, we maintain idiosyncratic positions in retailers, gaming and leisure. These investments skew toward higher quality issues within these subsectors.
Capital goods
The fundamental outlook is stable across industries like diversified manufacturing. The largest underweight within the sector comes from building materials, which has been the most impacted by decreasing home sales in recent years.
Weightings are relative to the Bloomberg U.S. Corporate High Yield 2% Issuer Capped Index as of 12/31/24.
Some say
Bonds may be challenged as interest rates fall.
Insight
Historically, many fixed income sectors have produced above-average returns following the beginning of a rate-cutting cycle. With the Fed likely to continue cutting rates in 2025, we believe income-oriented sectors can effectively complement a core bond allocation.
In our view, high yield, emerging markets bonds, investment-grade corporates and other sectors can potentially enable income investors to achieve long-term excess returns even as interest rates fall.
Some say
Investors just need stocks, not bonds, for income
Insight
Investments in higher income bonds in addition to dividend-paying stocks can help income-seeking investors fund a longer retirement. Higher income bonds include investment-grade and high-yield corporates, emerging markets and securitized. In addition to diversification, most of these bonds offer steady coupon payments. However, they also carry the risk of defaulting on their obligations.
Depending on their circumstances, income-seeking investors may want to consider allocating a portion of their investments to these riskier assets.
Some say
Current high-yield spreads are tight versus their historical average
Insight
While it’s natural for fixed income investors to be concerned with tight spreads, indicators such as starting yield to worst (YTW), credit quality and the likely direction of U.S. corporate earnings suggest that high yield may continue to outpace other fixed income sectors in 2025. With a starting YTW of nearly 7.5% and with more than 50%* of the high-yield market rated BB/Ba, we believe high yield can continue to complement a core bond allocation and potentially offer greater long-term income than dividend-paying stocks.
Source: Bloomberg. Data as of 12/31/24. In this case, yield to worst is defined as the lowest possible yield that an investor would receive if all the issuers in a fixed income fund fulfilled their payment obligations. *Based on the Bloomberg U.S. High Yield 2% Issuer Capped Index.
Some say
Only speculative investors should buy emerging markets debt
Insight
Emerging markets bonds can offer high income with currency and geographic diversity.
Many emerging markets sovereign bonds are investment-grade-rated, and the asset class comprises some of the fastest growing economies in the world. Idiosyncratic and geopolitical risks tied to emerging markets are real, and a capable asset manager with risk-control processes in place is paramount.
Some say
Municipal bonds are only for wealthy investors
Insight
Investors across multiple tax brackets can benefit from allocations to municipal bonds. Munis are typically exempt from federal taxes, and sometimes state and local taxes, which means investors can keep more of their interest income.
Beyond tax advantages, munis are lower risk compared to high-yield bonds and equities. They can also serve to diversify your portfolio.
- The distribution rate reflects the fund's past dividends paid to shareholders and may differ from the fund's SEC yield which reflects the rate at which the fund is earning income on its current portfolio of securities. The distribution rate reflects fee waivers and/or expense reimbursements in effect during the period. Without waivers and/or reimbursements, it would be reduced. A portion of the fund's distribution may be classified as a return of capital. Please refer to the fund's Annual Report for details.
- Calculated by Morningstar. Due to differing calculation methods, the figures shown here may differ from those calculated by Capital Group.
- Expense ratios are as of each fund's prospectus/characteristics statement available at the time of publication.
4. Certain share classes were offered after the inception dates of some funds. Results for these shares prior to the dates of first sale are hypothetical based on the original share class results without a sales charge, adjusted for typical estimated expenses.
- Class F-2 were first offered on 8/1/2008.
Results for certain funds with an inception date after the share class inception also include hypothetical returns because those funds' shares sold after the funds' date of first offering. View dates of first sale and specific expense adjustment information.
Duration indicates a bond fund’s sensitivity to interest rates. Higher duration indicates more sensitivity.
Sharpe ratio uses standard deviation and excess return to determine reward per unit of risk. The higher the number, the better the portfolio's historical risk-adjusted performance.
Annualized standard deviation (based on monthly returns) is a common measure of absolute volatility that tells how returns over time have varied from the mean. A lower number signifies lower volatility.
Correlation to S&P 500 is a measurement of how returns for the fund and S&P 500 move in relation to each other.
Bloomberg U.S. Corporate Investment Grade Index represents the universe of investment grade, publicly issued U.S. corporate and specified foreign debentures and secured notes that meet the specified maturity, liquidity, and quality requirements. This index is unmanaged, and its results include reinvested distributions but do not reflect the effect of sales charges, commissions, account fees, expenses or U.S. federal income taxes.
Bloomberg U.S. Corporate High Yield 2% Issuer Capped Index covers the universe of fixed-rate, non-investment-grade debt. The index limits the maximum exposure of any one issuer to 2%. This index is unmanaged, and its results include reinvested distributions but do not reflect the effect of sales charges, commissions, account fees, expenses or U.S. federal income taxes.
American Funds Multi-Sector Income Fund Custom Index comprises: 45% Bloomberg U.S. Corporate High Yield 2% Issuer Capped Index, 30% Bloomberg U.S. Corporate Investment Grade Index, 15% J.P. Morgan EMBI Global Diversified Index, 8% Bloomberg CMBS Ex AAA Index, 2% Bloomberg ABS Ex AAA Index and blends the respective indices by weighting their cumulative total returns according to the weights described. This assumes the blend is rebalanced monthly.
J.P. Morgan Emerging Market Bond Index (EMBI) Global Diversified is a uniquely weighted emerging market debt benchmark that tracks total returns for U.S. dollar-denominated bonds issued by emerging market sovereign and quasi-sovereign entities. This index is unmanaged, and its results include reinvested dividends and/or distributions but do not reflect the effect of account fees, expenses or U.S. federal income taxes.
J.P. Morgan CEMBI Broad Diversified Index tracks the performance of US dollar-denominated bonds issued by emerging market corporate entities.
JP Morgan Government Bond Index – Emerging Markets Global Diversified covers the universe of regularly traded, liquid fixed-rate, domestic currency emerging market government bonds to which international investors can gain exposure. This index is unmanaged, and its results include reinvested dividends and/or distributions but do not reflect the effect of account fees, expenses or U.S. federal income taxes.
Bloomberg CMBS Ex AAA Index: tracks investment-grade (Baa3/BBB- or higher, excluding Aaa/AAA) commercial mortgage backed securities that are included in the Bloomberg U.S. Aggregate Index. These securities have a minimum life of at least one year and must be fixed-rated weighted average coupon or capped weighted average coupon securities.
Bloomberg ABS Ex AAA Index: covers fixed-rated investment-grade (Baa3/BBB- or higher, excluding Aaa/AAA) asset backed securities that are included in the Bloomberg U.S. Aggregate Index. The index has three subsectors, which includes credit and charge cards, autos, and utility. These securities are ERISA-eligible and must have an average life of at least one year and must be senior class, tranche B or C of the deal.
The after-tax (or tax-equivalent) yield of a municipal bond investment is the yield a taxable bond would have to offer to equal the same amount as the tax-exempt bond. Highest tax rate assumes the 3.8% Medicare tax and the top federal marginal tax rate for 2024 of 27%.