It is no secret that the past 12 months have been extremely challenging for fixed income investors. High inflation and central bank rate hikes weighed on markets in 2022. More recently volatility has re-emerged, prompted by instability in the banking sector in the first quarter of 2023.
For investors wondering how to navigate fixed income markets from here, there are reasons to be positive. The silver lining of the weak bond returns in 2022 is much higher yields – and by extension, the scope for higher income - than we have seen in many years. This offers fresh opportunities across broad credit markets and could set the stage for positive returns going forward.
Past results are not a guarantee of future results. Yields and returns as at 31 March 2023 in USD terms. Sources: Capital Group, Bloomberg
Data goes back to 2004 for all sectors. Based on average monthly returns for each sector when in a +/- 0.3% range of yield to worst. Sector yields above include Bloomberg CMBS Ex AAA Index, Bloomberg US Corporate Index, Bloomberg US High Yield Corporate – 2% Issuer Capped Index and JPMorgan EMBI Global Diversified Index
With starting yields at levels between c.5% and 8.5%, depending on sector, the potential for fixed income assets to generate higher income is positive. However, price movements over 2022 were driven primarily by an extreme and rapid change in rates, alongside more persistent inflation. This has had an indiscriminate impact on broad fixed income markets. As a result, fixed income assets have become attractive across the entire spectrum.
Given the uncertain economic environment, there is still likely to be wide dispersion in returns across fixed income sectors. By investing broadly to diversify risks rather than concentrating exposure in one sector, there is the opportunity to generate an attractive high income and more consistent returns.
We have identified four key credit sectors that, combined, target reliable income with an attractive risk/return profile. Each sector has its own distinctive characteristics that complement each other to support a stable income stream.
US high yield provides the potential for a higher level of income. It is a sector with depth and breadth worth c.US$1.2 trillion1 spanning a multitude of industries and issuers. Although associated with higher credit risk, 50% of the index is now rated BB (the highest credit quality for high yield)1 and offers a yield of 8.5%.2
Investment grade corporates are higher quality credits, but have longer duration so are more sensitive to movements in rates. This is the largest sector in the credit universe; it is well-diversified across issuers and industries, and includes securities with maturities across the yield curve.
Emerging market debt offers diversified sources of income and return. The market for sovereign emerging market US dollar bonds is worth US$1.1 trillion and has average credit rating of BBB-.3 It is a diverse with more than 70 investible countries across Asia, Europe, Africa and the Americas. In terms of credit quality, opportunities extend across investment grade and high yield issuers.
Securitised credit is an under-researched area that provides potential for alpha opportunities. Securitised credit offers a higher level of income than comparably rated investment grade corporates, while typically offering similar capital preservation features. Many of the fundamental drivers are distinct from corporate and sovereign credit, bringing diversity to a portfolio.
We believe that combining the power of four credit sectors could be a very attractive way to deliver clients a reliable income stream.
Diversification across credit sectors underpins Capital Group Multi-Sector Income Fund’s (LUX) ability to target consistent income with lower volatility. All four sectors of the credit universe play an important role in income-seeking portfolios. The high income of the high yield and emerging markets debt sectors are balanced by the defensiveness of the higher quality investment grade corporates and securitised sectors. The shorter duration of high-yield and securitised credit temper the higher interest rate sensitivity of the investment grade and EMD sectors.
Capital Group Multi-Sector Income Fund (LUX) is part of a strategy that was launched in the US in March 2019 with the same investment team.
To read more about how Capital Group Multi-Sector Income Fund (LUX) targets income and stability, download the full paper.
1As at 31 December 2022. As measured by Bloomberg US High Yield Corporate - 2% Issuer Capped Index. Credit rating based on the higher of S&P/Moody’s/Fitch. Sources: Bloomberg, JPMorgan
2As at 31 March 2023. Yield to worst Bloomberg US High Yield Corporate.- 2% Issuer Capped Index. Source: Bloomberg
3As at 31 December 2022. As measured by JPMorgan EMBI Global Diversified Index. Credit rating based on the higher of S&P/Moody’s/Fitch. Source: JPMorgan
Statements attributed to an individual represent the opinions of that individual as of the date published and may not necessarily reflect the view of Capital Group or its affiliates.
Risk factors you should consider before investing:
This material is not intended to provide investment advice or be considered a personal recommendation.
The value of investments and income from them can go down as well as up and you may lose some or all of your initial investment.
Past results are not a guide to future results.
If the currency in which you invest strengthens against the currency in which the underlying investments of the fund are made, the value of your investment will decrease. Currency hedging seeks to limit this, but there is no guarantee that hedging will be totally successful.
The Prospectus – together with any locally-required offering documentation – sets out risks, which, depending on the fund, may include risks associated with investing in fixed income, derivatives, emerging markets and/or high-yield securities; emerging markets are volatile and may suffer from liquidity problems.
The fund may invest in financial derivative instruments for investment purposes, hedging and/or efficient portfolio management.
Damien J. McCann is a fixed income portfolio manager at Capital Group. He has 23 years of investment industry experience, all with Capital Group. Earlier in his career at Capital, he was a fixed income investment analyst and covered energy, leisure and lodging, and rails. He holds a bachelor's degree in business administration with an emphasis on finance from California State University, Northridge. He also holds the Chartered Financial Analyst® designation. Damien is based in Los Angeles.
Flavio Carpenzano is an investment director at Capital Group. He has 18 years of industry experience and has been with Capital Group for two years. He holds a master's degree in finance and economics from Università Bocconi. Flavio is based in London.
This material is intended for the internal and confidential use of the recipient and not for onward transmission to any other third party. This communication is issued by Capital International Management Company Sàrl (CIMC), unless otherwise stated, which is regulated by the Luxembourg CSSF - Commission de Surveillance du Secteur Financier.
In Singapore, this communication has been prepared by Capital Group Investment Management Pte. Ltd. (CGIMPL), a member of Capital Group, a company incorporated in Singapore. This advertisement or publication has not been reviewed by the Monetary Authority of Singapore or any other regulator.
This communication is of a general nature, and not intended to provide investment, tax or other advice, or to be a solicitation to buy or sell any securities. All information is as at the date indicated and attributed to Capital Group unless otherwise stated. While Capital Group uses reasonable efforts to obtain information from third-party sources which it believes to be accurate, this cannot be guaranteed.
CIMC manages the Luxembourg based UCITS fund(s), organised as a SICAV, which is a (are) sub-fund(s) of Capital International Fund ("CIF"). The fund(s) is (are) offered only by Prospectus, together with any locally-required offering documentation. In Europe, this is the UCITS Key Investor Information Document (KIID)/PRIIPs Key Information Document (KID) and in Singapore the Product Highlights Sheet (PHS). These documents are available free of charge and in English at capitalgroup.com, and should be read carefully before investing.
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The material is not intended to be distributed or used by persons in jurisdictions which prohibit its distribution. If you act as representative of a client it is your responsibility to ensure that the offering or sale of fund shares complies with relevant local laws and regulations.
The information in relation to the index is provided for context and illustration only. The fund is an actively managed UCITS. It is not managed in reference to a benchmark.
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Past results are not a guarantee of future results. The value of investments and income from them can go down as well as up and you may lose some or all of your initial investment. This information is not intended to provide investment, tax or other advice, or to be a solicitation to buy or sell any securities.
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. All information is as at the date indicated unless otherwise stated. Some information may have been obtained from third parties, and as such the reliability of that information is not guaranteed.