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2016 Outlook

Sustainable income  |  Bonds  |  January 2016
Who Said This Is a Low-Yield World?

A Step-Up in “Plus Sector” Yields Suggests Greater Return Potential for Long-Term Investors

“There are some attractive valuations in the U.S. high-yield bond market. Overall corporate fundamentals appear sound, though we’re keeping a close eye on rising leverage. In emerging markets debt, substantial variation among country fundamentals and policy responses is creating a varied investment environment. Consequently, there are diverse opportunities for longer term investors who are selective.”

Laurentius Harrer Portfolio Manager Los Angeles office 28 years of experience (as of 12/31/16)

Recent Weakness in Emerging Markets and High-Yield Sectors Has Resulted in Attractive Yields

Sources: Bloomberg Barclays Research, J.P. Morgan.
Yields are for December 31, 2014, to December 31, 2015, from Bloomberg Barclays U.S. High Yield Index, J.P. Morgan Government Bond Index-Emerging Markets (GBI-EM) Global Diversified, Bloomberg Barclays Municipal High Yield Index and J.P. Morgan Emerging Markets Bond Index Global.

Hungry for yield? If so, fragile market confidence in emerging markets and high-yield bonds could be viewed as a great opportunity to invest selectively.

Emerging markets debt is not all the same. Against a backdrop of uneven global growth, variation among country fundamentals and policy responses has created meaningful differences in bond valuations, yields and currencies. Investor sentiment could continue to be fragile in the face of slowing growth in China, lower commodity prices and prospects for higher U.S. interest rates.

Broadly speaking, high-yield corporate bonds offer relatively attractive yields. But there is a clear division in the market. As oil and commodity prices declined, yields for U.S. energy sector and metals and mining sector issues have risen much more than the rest of the market. But while financial stresses have become more apparent among commodity-related issuers, in other sectors solid fundamentals are more prevalent. Meanwhile, depending on an investor’s net tax burden, high-yield munis may offer even higher yields.

Though some currencies may depreciate further, emerging economies are generally in better shape to weather near-term challenges. In addition to dollar-denominated bonds, certain local markets offer relatively attractive total return potential. In high yield, valuations within the energy sector appear particularly attractive, but selectivity is also essential. Credit research can help identify those firms that appear better positioned to navigate this environment.

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This material is intended for use by financial professionals or in conjunction with the advice of a financial professional.

Investors should carefully consider investment objectives, risks, charges and expenses. 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. 

Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. This information is intended to highlight issues and not to be comprehensive or to provide advice.