TODAY’S CHALLENGE
CPI: +3.5% in March 2024*
Mixed economic indicators and a cautious Federal Reserve create uncertainty in fixed income markets.
Webinar: Credit and core bond opportunities
CPI: +3.5% in March 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 yields, complemented core (F-2 shares)
AHMFX's tax-equivalent 30-day SEC yield (gross/net) for the F-2 share class at the highest federal tax rate were 7.62%/7.64% as of 4/30/24.
*Tax-equivalent 12-month distribution rate: Highest tax rate assumes the 3.8% Medicare tax and the top federal marginal tax rate for 2024 of 37%. Morningstar Intermediate Core Bond and Morningstar Intermediate Core-Plus Bond are category averages. Source: 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 3/31/24.
Overweight
Securitized
The fund’s managers remain committed to emphasizing higher quality credit and we maintained an overweight position in securitized issues. Although securitized credit spreads tightened marginally relative to other credit sectors during Q1, higher quality commercial-backed mortgage securities (CMBS) and asset-backed securities (ABS) remained attractive compared to similarly rated corporate debt.
Investment-grade credit (BBB/Baa and above)
We believe investment-grade corporate valuations have become more attractive relative to high-yield corporate debt. The Fed’s recent pause in its rate-hiking cycle has benefited longer duration bonds and the economic backdrop remains supportive for corporate credit. We have maintained our current position in the sector and believe that idiosyncratic opportunities will drive returns.
Underweight
High yield
The fund’s managers trimmed the portfolio’s high-yield exposure modestly during the quarter as the sector’s value has decreased relative to higher quality credit. We believe that high yield will be a credit selectors’ market in 2024, allowing for attractive idiosyncratic investing across industries.
Emerging markets
We still consider high-yield EM sovereign bonds appealing when compared to similarly rated high-yield corporates. Accordingly, we increased the fund’s allocation to EM sovereigns during the quarter. This idiosyncratic market appears bifurcated between distressed and more stable sovereigns. Among performing sovereigns, we believe market fundamentals remain healthy relative to some developed market economies.
Weightings are relative to the American Funds Multi-Sector Income Fund Custom Index. As of 3/31/24.
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Strategy
Remaining constructive within a credit selectors’ market
As of 3/31/24.
- Spreads continued to tighten during the first quarter but were somewhat counterbalanced by rising U.S. Treasury yields. Current valuations remain near cycle tights but reflect healthy fundamentals and an optimistic outlook for sustained economic growth.
- The fund was a net seller of credit, decreasing high-yield corporates while modestly increasing investment-grade corporates and emerging markets debt. The fund continues to favor higher quality sectors, but the portfolio’s yield has remained relatively unchanged since the start of the year.
- The fund’s managers maintain a positive outlook for the U.S. economy and anticipate that credit fundamentals and market technicals will continue to support current valuations. However, broad valuations across corporate credit markets have little room for further tightening, emphasizing the importance of prudent credit selection in seeking excess returns.
Source: Capital Group. As of 3/31/24.
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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 slows
Industries shown below are among the fund's notable overweights and underweights relative to the index
Sources: Capital Group, Bloomberg. Data as of 3/31/24.
Overweight
Energy
The energy industry has lower debt leverage and improved cash flow following two recent default cycles in 2015 and 2020. Although demand may weaken with slower economic growth, supply and demand should remain balanced and supportive of energy prices.
Brokerage, asset managers & exchanges
Financial advisory platforms are growing via consolidation and should benefit from higher interest rates.
Underweight
Consumer cyclical
The consumer cyclical sector includes industries that are closely tied to discretionary consumer spending such as automotive and retailers. These are spending items that people typically defer in a weaker economy.
Communications
Nearly 40% of the portfolio’s communications holdings are in three high-conviction companies. Several large issuers in the sector are investing aggressively on capital expenditures, reducing cash flow available for debt service.
Weightings are relative to the Bloomberg U.S. Corporate High Yield 2% Issuer Capped Index as of 3/31/24.
Some say
It’s better to stay in cash amid uncertainty.
Insight
We believe current yields can provide a cushion against price volatility for income investors even within an uncertain economic environment. With the federal funds target rate likely at a near-term high, the potential for Fed rate cuts later in 2024 could help create a tailwind for bonds.
In our view, high yield, emerging markets bonds, investment-grade corporates and other sectors can enable income investors to achieve long-term excess returns even as the timing of rate cuts remains uncertain.
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
Companies with high-yield debt often default
Insight
Both the quality and variety of high-yield companies have improved since the boom-and-bust periods of the 1980s. As of year-end 2023, the highest rated high-yield issuers (BB+) accounted for roughly half of the U.S. high-yield bond sector.
The default rate at year-end 2023 was 2.8%, versus a historical average of around 3.4%. It peaked at 6.2% during the pandemic. Adding high yield to a core bond portfolio can help investors who are willing to take a little more risk in seeking their income goals.
Sources: J.P. Morgan, Bloomberg. Data as of 12/31/23.
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.
Figures shown are past results and are not predictive of results in future periods. Current and future results may be lower or higher than those shown. Investing for short periods makes losses more likely.
Prices and returns will vary, so investors may lose money.
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Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.
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This and other important information is contained in the fund prospectuses and summary prospectuses, which can be obtained from a financial professional and should be read carefully before investing.
Bond ratings, which typically range from AAA/Aaa (highest) to D (lowest), are assigned by credit rating agencies such as Standard & Poor's, Moody's and/or Fitch, as an indication of an issuer's creditworthiness.
The use of derivatives involves a variety of risks, which may be different from, or greater than, the risks associated with investing in traditional securities, such as stocks and bonds.
Lower rated bonds are subject to greater fluctuations in value and risk of loss of income and principal than higher rated bonds.
The return of principal for bond funds and for funds with significant underlying bond holdings is not guaranteed. Fund shares are subject to the same interest rate, inflation and credit risks associated with the underlying bond holdings.
Income from municipal bonds may be subject to state or local income taxes and/or the federal alternative minimum tax. Certain other income, as well as capital gain distributions, may be taxable.
Investing outside the United States involves risks, such as currency fluctuations, periods of illiquidity and price volatility. These risks may be heightened in connection with investments in developing countries.
Nondiversified funds have the ability to invest a larger percentage of assets in securities of individual issuers than a diversified fund. As a result, a single issuer could adversely affect a fund's results more than if the fund invested a smaller percentage of assets in securities of that issuer. Refer to the applicable prospectus for details.
(American Funds Emerging Markets Bond Fund)
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Portfolios are managed, so holdings will change.
Certain fixed income and/or cash and equivalents holdings may be held through mutual funds managed by the investment adviser or its affiliates that are not offered to the public.
Totals may not reconcile due to rounding.
When applicable, results reflect fee waivers and/or expense reimbursements, without which they would have been lower and net expenses higher. Please refer to capitalgroup.com for more information.
Read details about how waivers and/or reimbursements affect the results for each fund.
View results and yields without fee waiver and/or expense reimbursement.
- The distribution rate reflects the fund's past dividends paid to shareholders and may differ from the fund's SEC yield. It 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.
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On or around July 1, 2024, American Funds Distributors, Inc. will be renamed Capital Client Group, Inc.
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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 2023 of 27%.