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Fixed income challenges continued in the second quarter

Long-term view vital in a short-term volatile environment

David Bradin
Investment Director

Seju Shah
Investment Product Specialist

Key takeaways for the quarter ended June 30, 2022

  • The second quarter remained challenging for fixed income as markets faced ongoing inflation, sizable rate hikes and increased potential for a recession.
  • Despite the difficult quarter for bonds, the majority of fixed income American Funds maintained positive returns over longer term periods.
  • Important goals for core fixed income funds include income, inflation protection, capital preservation and diversification from equities.

The second quarter was marked by increased inflation, rising rates following sizeable U.S. Federal Reserve rate hikes, ongoing geopolitical turmoil and a growing risk of an economic slowdown. Nearly all areas of the fixed income market experienced declines. American Funds fixed income strategies saw mixed results on an index-relative basis over the three months ending June 2022. The majority of the funds maintained positive returns over longer term periods.

High inflation weighed on the economy. The Fed grew increasingly hawkish, responding with substantial policy rate hikes — 50 basis points (bps) in May and 75 bps in June — marking the highest incremental rate hike since 1994. Additionally, balance sheet normalization is underway. By September, the Fed’s assets will decline at a maximum pace of $95 billion a month. This may include $60 billion in Treasuries and $35 billion in mortgage-backed securities.

The Fed has communicated a strong commitment to addressing inflation through policy tightening. However, tighter financial conditions and growing economic risks may limit the Fed’s response to inflation over the medium term. Amid uncertainty surrounding the Fed path, U.S. Treasury yields were volatile and rose meaningfully over the period. The two-year, five-year, 10-year and 30-year Treasury yields rose 62 bps, 58 bps, 68 bps and 74 bps, respectively. The 10-year Treasury yield ended the quarter at 3.02%. The spread between two-year and 10-year maturities (“2s-10s”) and five-year and 30-year maturities (“5s-30s”) increased 6 and 16 bps, respectively, which resulted in a steeper yield curve.

Driven by concerns of slower economic growth ahead, credit spreads widened over the quarter, most notably in high yield. Investment-grade (BBB/Baa and above) credit spreads ended the quarter at 143 bps over Treasuries, wider by 35 bps compared to the previous quarter-end. High-yield credit spreads ended the quarter at 569 bps over Treasuries, up 244 bps from March. The yield to worst on the Bloomberg U.S. High Yield Index reached 8.89% as of June 30, 2022.

Inflation remains a risk for investors. Inflationary pressures have both intensified and broadened across more categories while shelter inflation — a meaningful component of inflation measures — has accelerated. This suggests inflation is becoming more entrenched.

Anchoring your portfolio with bond funds

Given the outlook for sustained inflation and tight financial conditions, a disciplined approach to overall portfolio construction remains critical. With downward pressure on financial conditions, hedging against equity volatility will continue to be a role for core bond funds. Broadly, fixed income may help provide income, capital preservation, diversify from equity risk and deliver inflation protection, all of which are vital for investor portfolios in the current environment.

Funds like American Funds Strategic Bond FundSM for a core plus allocation, The Bond Fund of America® for a core allocation and Intermediate Bond Fund of America® to seek greater capital preservation are three building blocks that can help investors seek prudent portfolio construction and pursue these investment goals.

American Funds Strategic Bond Fund (ANBFX, Class F-2) uses a differentiated, disciplined approach that focuses primarily on duration, yield curve and inflation positioning, with a lesser, more opportunistic focus on credit sectors. The fund can help anchor a bond allocation, while aiming to maintain lower correlation with equities. It has delivered superior excess returns versus the benchmark, the Bloomberg U.S. Aggregate Index, over the one-, three- and five-year periods (217 bps, 354 bps and 234 bps, respectively).

The Bond Fund of America (ABNFX, Class F-2), our flagship core fund, takes a gradual, contrarian approach to core investing. Fund managers use a disciplined, value-based approach to sector positioning, striving for strong security selection in corporate bonds, mortgage-backed securities and U.S. Treasury notes. The strategy outpaced its benchmark, the Bloomberg U.S. Aggregate Index, over one-, three-, five- and 10-year periods (58 bps, 127 bps, 71 bps and 52 bps, respectively).

For those concerned about rising rates, Intermediate Bond Fund of America (IBAFX, Class F-2) may be one possible solution. It uses a disciplined, high-quality approach to sector positioning, seeking strong security selection in high-quality corporate bonds, agency mortgage-backed securities and Treasury Inflation-Protected Securities (TIPS). Importantly, its approach has entailed roughly half the interest rate risk (as measured by duration, as of June 30, 2022) of The Bond Fund of America. This more conservative fund can, therefore, be considered a high-quality core allocation that aims to take less interest rate risk. The fund has outpaced its benchmark, the Bloomberg U.S. Government/Credit (1-7 years, ex BBB) Index, for the one-, three-, five- and 10-year periods (53 bps, 81 bps, 43 bps, and 17 bps respectively).

Fund managers continue to exercise discipline within fixed income strategies

By the end of the second quarter, our core bond funds — The Bond Fund of America, American Funds Strategic Bond Fund and Short-Term Bond Fund of America® — were underweight duration versus their benchmarks. Intermediate Bond Fund of America was underweight duration compared with its secondary benchmark, the Bloomberg 75% Government Credit 1-7 Years 25% Securitized Index, at the end of the quarter. Duration indicates a bond fund’s sensitivity to interest rates; generally, lower duration indicates less sensitivity. The portfolios also maintained allocations to TIPS. Additionally, the portfolios were generally positioned to benefit from potential yield curve steepening — when the difference between short and long-term Treasury yields increases — by the end of the quarter to balance growing economic risks.

From a market-value perspective, The Bond Fund of America and American Funds Strategic Bond Fund were underweight mortgage-backed securities compared to their benchmarks at the start of the quarter, and took opportunities to reduce these underweights over the quarter. Both strategies similarly increased relative exposure to investment-grade credit slightly on recent spread widening. For American Funds Strategic Bond Fund, the managers reduced their hedging position on investment-grade bonds during the quarter.

Navigating negative U.S. bond market sector returns

U.S. bond market returns were negative for the quarter due primarily to yields rising across the curve. The Bloomberg U.S. Aggregate Index returned -4.69%. Assets with lower duration held up better than their long duration counterparts. Credit markets were challenged, and lower quality bonds generally lagged higher quality corporates. Non-U.S. bonds lagged U.S. counterparts, and high-quality municipal bonds outperformed U.S. Treasuries.

Within this environment, our fixed income funds (Class F-2 shares) had mixed relative results. Six of our 18 funds delivered results in line (within 10 bps) or ahead of their primary benchmarks. U.S. funds with less interest rate sensitivity and those with higher quality biases were among the strongest from a benchmark-relative perspective. Funds with greater exposure to credit, duration and non-U.S. debt were more challenged over the period.

Notably, American Funds Multi-Sector Income Fund (MIAYX, Class F-2) outpaced its blended benchmark over the quarter (54 bps), one-year period (234 bps) and three-year period (201 bps), highlighting the advantage of its distinctive approach. The fund is designed to take advantage of opportunities diversified across multiple fixed income sectors and seeks to provide high income. As of June 30, 2022, managers focused on increasing the fund’s credit quality as the interest rate and economic outlook became less certain. The fund remains modestly defensive and has reduced its allocation to high-yield corporates while increasing both securitized and investment-grade corporates.

The Tax-Exempt Bond Fund of America® (TEAFX, Class F-2), our most diversified municipal bond fund, returned -3.75% for the quarter. During the quarter the fund lagged its benchmark, the Bloomberg Municipal Bond Index. Over the longer term, however, the fund’s results (over the trailing five- and 10-year periods) remain ahead of its primary benchmark. The fund focuses on investment-grade securities, with the flexibility to own higher income securities across the rating spectrum. The strategy takes a risk-aware approach and seeks to add value through selectivity of both credit and interest rate exposures.

Fund results and analysis



Quarterly attribution reports

Explore Quarterly Commentaries


Model portfolios

All returns are for Class F-2 shares unless stated otherwise.

Results as of June 30, 2022. 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. Share prices and returns will vary, so investors may lose money. Investing for short periods makes losses more likely. View fund expense ratios and returns.

Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.

Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the mutual fund prospectuses and summary prospectuses, which can be obtained from a financial professional, and should be read carefully before investing.

Investment results assume all distributions are reinvested and reflect applicable fees and expenses. Returns for one year or less are not annualized, but calculated as cumulative total returns.

When applicable, results reflect fee waivers and/or expense reimbursements, without which they would have been lower. 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

Class F-2 shares were first offered on August 1, 2008. Class F-2 share results prior to the date of first sale are hypothetical based on the results of the original share class of the fund without a sales charge, adjusted for typical estimated expenses. Results for certain funds with an inception date after August 1, 2008, also include hypothetical returns because those funds’ Class F-2 shares sold after the funds’ date of first offering. Please refer to for more information on specific expense adjustments and the actual dates of first sale.

There may have been periods when the funds have lagged the index(es). Certain market indexes are unmanaged and, therefore, have no expenses. Investors cannot invest directly in an index.

The Bloomberg U.S. Corporate High Yield Index covers the universe of fixed-rate, non-investment-grade debt. The Bloomberg U.S. Aggregate Index represents the U.S. investment-grade fixed-rate bond market. The Bloomberg U.S. Government/Credit (1-7 Years, ex BBB) Index is a market-value weighted index that tracks the total return results of fixed-rate, publicly placed, dollar-denominated obligations issued by the U.S. Treasury, U.S. government agencies, quasi-federal corporations, corporate or foreign debt guaranteed by the U.S. government, and U.S. corporate and foreign debentures and secured notes that meet specified maturity, liquidity and quality requirements, with maturities of one to seven years, excluding BBB-rated securities. The Bloomberg Municipal Bond Index is a market-value-weighted index designed to represent the long-term investment-grade tax-exempt bond market. The Bloomberg 75% Government Credit 1-7 Years 25% Securitized Index; 75% broad-based flagship benchmark that measures the non-securitized component of the US Aggregate Index. The index includes investment grade, US dollar-denominated, fixed-rate treasuries, government-related and corporate securities. 25% securitized component of the U.S. Aggregate Index. Includes MBS, ABS, and CMBS. The American Funds Multi-Sector Income Fund Custom Index comprises: 45% Bloomberg U.S. High Yield Index 2% Issuer Cap, 30% Bloomberg U.S. Corporate 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. The Bloomberg U.S. High Yield Index 2% Issuer Cap 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. The Bloomberg U.S. Corporate 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. The J.P. Morgan EMBI Global Diversified Index 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. The Bloomberg CMBS Ex AAA Index is the CMBS component of the U.S. Aggregate index. Excludes AAA rated debt. The Bloomberg ABS Ex AAA Index is the ABS component of the U.S. Aggregate index. Excludes AAA rated debt.

Yield to worst is the lowest yield that can be realized by either calling or putting on one of the available call/put dates, or holding a bond to maturity.

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.

The use of derivatives involves a variety of risks, which may be different from, or greater than, the risks associated with investing in traditional cash securities, such as stocks and bonds.

The return of principal for bond portfolios and for portfolios with significant underlying bond holdings is not guaranteed. Investments are subject to the same interest rate, inflation and credit risks associated with the underlying bond holdings. Lower rated bonds are subject to greater fluctuations in value and risk of loss of income and principal than higher rated bonds.

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.

Income from municipal bonds may be subject to state or local income taxes. Certain other income, as well as capital gain distributions, may be taxable.

American Funds Strategic Bond Fund may engage in frequent and active trading of its portfolio securities, which may involve correspondingly greater transaction costs, adversely affecting the fund’s results.

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.

BLOOMBERG® is a trademark and service mark of Bloomberg Finance L.P. and its affiliates (collectively “Bloomberg”). Bloomberg or Bloomberg’s licensors own all proprietary rights in the Bloomberg Indices. Neither Bloomberg nor Bloomberg’s licensors approves or endorses this material, or guarantees the accuracy or completeness of any information herein, or makes any warranty, express or implied, as to the results to be obtained therefrom and, to the maximum extent allowed by law, neither shall have any liability or responsibility for injury or damages arising in connection therewith.

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