Key takeaways for the quarter ended December 31, 2024
Fixed income markets generally lost ground in the fourth quarter. Yields ended the quarter higher as markets digested resilient economic data, the outcome of the U.S. election and its impacts on future policy, along with the Fed’s less dovish stance at its December meeting. A strong employment print in October caused yields to rise, and they continued moving higher for much of the quarter. The Fed continued its cutting cycle with two additional 25 basis points (bps) cuts in November and December. Though notably at its December meeting, policymakers signaled fewer expected cuts in 2025 (projecting two cuts, down from four in its September projections), as well as improved economic projections. Markets also contended with the implications of policy from the incoming Trump administration, especially as it pertains to tariffs, immigration and fiscal policy. Elsewhere, risk assets remained attractive as U.S. stock indexes continued hitting all-time highs. Credit spreads across most fixed income sectors tightened modestly. Shorter duration bonds generally outperformed their longer duration counterparts. (Duration indicates a bond fund’s sensitivity to interest rates; generally, lower duration indicates less sensitivity.) The Bloomberg U.S. Aggregate Index returned -3.06% for the quarter.
The Treasury yield curve remained in positively sloping territory this quarter, though it remains relatively flat. The spread between 2-year and 10-year Treasuries (“2s-10s”) finished the quarter at 33 bps. The 2-year, 5-year, 10-year and 30-year Treasury yields increased 60 bps, 82 bps, 79 bps and 66 bps, respectively. The 10-year Treasury yield ended the quarter at 4.57% and the 2-year Treasury yield ended the quarter at 4.24%. Looking ahead, we believe there are multiple outcomes that suggest more yield curve steepening over time.
Inflation data have generally continued moderating, yet remain above the Fed’s 2% target. The Consumer Price Index (CPI) ticked up in November to rise at an annualized 2.7%, up from 2.4% at the end of September 2024, but down from 3.4% at the end of 2023. Underlying data in the November CPI print offered some encouraging signs as both owner’s equivalent rent and ordinary rent continued their downward path. Meanwhile, unemployment ticked up slightly to 4.2%, although, importantly, remains at near historic low levels. The impact of potential changes to immigration policy is unclear, and with a rise in continuing jobless claims, permanent job losses and subdued job openings per unemployed person, the Fed will look to remain balanced in future policy decisions.
Credit spreads across high-yield and investment-grade (BBB/Baa and above) markets modestly tightened this quarter. Investment-grade credit spreads ended the quarter at 80 bps over Treasuries, tighter by 9 bps compared to the previous quarter-end. High-yield credit spreads ended the quarter at 287 bps over Treasuries, tighter by 8 bps from September 30, 2024. The yield to worst on the Bloomberg U.S. Corporate High Yield Index 2% Issuer Capped Index was 7.49% as of the end of December.
Sources: Bloomberg Index Services Ltd., RIMES. As of 12/31/24. Past results are not predictive of results in future periods.
Source: Bloomberg Index Services Ltd. As of 12/31/24. Past results are not predictive of results in future periods.
U.S. fixed income markets generally lost ground in the fourth quarter amidst continued resilience in the U.S. economy, moderating but sticky inflation, the possibility of a less dovish Fed and uncertainty over the new presidential administration.
Below–investment-grade corporate credit delivered the strongest results, with a modestly positive outcome. The Bloomberg U.S. Aggregate Index, which represents the broad bond market, returned -3.06%. Amidst generally rising yields, securities with shorter duration generally outpaced their longer duration counterparts.
Amidst rising rates and modestly tightening spreads, our taxable high yield and most short-term portfolios experienced positive absolute returns. In terms of benchmark relative results, 18 of our 27 fixed income mutual funds and ETFs delivered results in line (within 10 bps) or ahead of their primary benchmarks. Generally, funds with shorter duration benefited as yields rose. And while credit spreads only modestly tightened, exposure to corporate credit was also generally additive.
Anchoring your portfolio with disciplined fixed income mutual funds and ETFs
In response to a more resilient growth environment and a recent rise in Treasury yields, we believe there are multiple areas of opportunity within fixed income. Continuing U.S. economic resilience and expectations for ongoing monetary policy easing globally provide a solid backdrop, though we believe selectivity will remain key as spreads in some risk sectors remain below historical average levels. Therefore, we look to construct portfolios that reflect balanced risks across excess return drivers. Broadly, fixed income seeks to provide income, preserve capital, diversify from equity risk and pursue inflation protection — all of which can be vital for investor portfolios as the market remains uncertain.
Funds like American Funds Strategic Bond Fund for a core plus allocation, The Bond Fund of America® and The Tax-Exempt Bond Fund of America® for a core allocation, and American Funds Multi-Sector Income Fund to pursue diversified income, are all building blocks that can help investors seek prudent portfolio construction and pursue these investment goals.
The Bond Fund of America (ABNFX, Class F-2), our flagship core mutual fund, takes a gradual, balanced 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 (MBS) and U.S. Treasury notes. The fund outpaced its benchmark, the Bloomberg U.S. Aggregate Index, over the 3-, 5- and 10-year periods (by 9 bps, 86 bps and 42 bps, respectively).
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 a low correlation with equities. It has delivered positive excess returns versus the benchmark, the Bloomberg U.S. Aggregate Index, over a long-term five-year period (116 bps).
CGCP — Capital Group Core Plus Income ETF can help anchor a portfolio while pursuing a consistent income. CGCP (net asset value, “NAV”) outpaced its primary index, the Bloomberg U.S. Aggregate Index, by 45 bps for the quarter. The ETF leverages multiple sources of active return potential, balancing preserving capital and pursuing income while also seeking total return. It invests across a diversified set of income sectors, including investment-grade and high-yield credit, securitized credit and emerging markets (EM) debt, aimed at generating a resilient income stream.
The Tax-Exempt Bond Fund of America (TEAFX, Class F-2), our most diversified municipal bond mutual fund, exceeded its benchmark, the Bloomberg Municipal Bond Index, over the 1-year (144 bps), 3-year (38 bps), 5-year (31 bps) and 10-year (15 bps) periods. The fund focuses on investment-grade securities with the flexibility to own higher income securities across the rating spectrum. TEAFX takes a risk-aware approach and seeks to add value through selectivity of both credit and interest rate exposures.
CGMU — Capital Group Municipal Income ETF is a single-solution core municipal bond allocation that incorporates high-yield municipal bonds in its pursuit of resilient income. CGMU (NAV) trailed its primary index, the 85%/15% Bloomberg 1–15 Year Blend (1–17 Year) Municipal Bond Index/Bloomberg 1–15 Year Blend (1–17 Year) High Yield Municipal Bond Index, by 6 bps for the quarter. The fund’s investment objective is to provide a high level of current income exempt from regular federal income tax, consistent with the preservation of capital.
American Funds Multi-Sector Income Fund (MIAYX, Class F-2) outpaced its blended benchmark over the 3-year (91 bps) and 5-year (140 bps) periods, highlighting the advantage of its distinctive approach. The fund is designed to pursue opportunities diversified across multiple fixed income sectors and seeks to provide high income.
CGMS — Capital Group U.S. Multi-Sector Income ETF is an option for investors seeking a higher income bond allocation. CGMS (NAV) led its primary index, the Bloomberg U.S. Aggregate Index, by 260 bps for the quarter. This U.S.-focused ETF leverages Capital Group’s research capabilities across a range of income sectors, both investment-grade and below-investment-grade, while managing credit risk and volatility.
Market outlook
Looking ahead, some portfolio themes include:
* This commentary excludes the American Funds Portfolio Series and American Funds Insurance Series® fixed income mutual funds.
All mutual fund returns are for Class F-2 shares unless stated otherwise.
Results as of December 31, 2024. 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. Share prices and returns will vary, so investors may lose money. Refer to fund expense ratios and returns. View ETF expense ratios and returns.
Market price returns are determined using the official closing price of the fund's shares and do not represent the returns you would receive if you traded shares at other times.
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As nondiversified funds, CGCP, CGMS and CGMU have the ability to invest a larger percentage of assets in the securities of a smaller number of issuers than a diversified fund. As a result, poor results by a single issuer could adversely affect fund results more than if the fund invested in a larger number of issuers. See the applicable prospectus for details.
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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. Refer to 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 capitalgroup.com for more information on specific expense adjustments and the actual dates of first sale.
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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 High Yield Municipal Bond Index is a market-value-weighted index composed of municipal bonds rated below BBB/Baa. The 85%/15% Bloomberg 1-15 Year Blend (1-17) Municipal Bond Index/Bloomberg 1-15 Year Blend (1-17) High Yield Municipal Bond Index blends the Bloomberg 1-15 Year Blend (1-17) Municipal Bond Index with the Bloomberg 1-15 Year Blend (1-17) High Yield Municipal Bond Index by weighting their cumulative total returns at 85% and 15%, respectively. The blend is rebalanced monthly. Bloomberg 1-15 Year Blend (1-17) Municipal Bond Index consists of a broad selection of investment-grade general obligation and revenue bonds of maturities ranging from one year to 17 years. Bloomberg 1-15 Year Blend (1-17) High Yield Municipal Bond Index consists of a broad selection of below-investment-grade general obligation and revenue bonds of maturities ranging from one year to 17 years. The Bloomberg Municipal Bond Index is a market-value-weighted index designed to represent the long-term investment-grade tax-exempt bond market. American Funds Multi-Sector Income Fund Custom Index comprises 45% Bloomberg U.S. High Yield Index 2% Issuer Cap, 30% Bloomberg U.S. Corporate Investment Grade Index, 15% J.P. Morgan EMBI Global Diversified Index, 8% Bloomberg CMBS ex AAA Index and 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. 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%. J.P. Morgan EMBI Global Diversified Index is a uniquely weighted emerging markets debt benchmark that tracks total returns for U.S. dollar-denominated bonds issued by emerging markets sovereign and quasi-sovereign entities. 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. Bloomberg CMBS ex AAA Index represents the universe of U.S. commercial mortgage-backed securities, excluding issuers with credit ratings of AAA, the highest credit quality rating. Bloomberg ABS ex AAA Index represents the universe of U.S. asset-backed securities, excluding issuers with credit ratings of AAA, the highest credit quality rating. The indexes are unmanaged, and results include reinvested distributions but do not reflect the effect of sales charges, commissions, account fees, expenses or U.S. federal income taxes. The fund’s composition is based on internal classifications and prospectus requirements, while the custom index’s composition is based on each component index provider’s respective sector classifications. Bloomberg U.S. MBS Index is the U.S. MBS component of the U.S. Aggregate Index. The MBS Index covers the mortgage-backed pass-through securities of Ginnie Mae (GNMA), Fannie Mae (FNMA) and Freddie Mac (FHLMC).
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.
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.
Investments in mortgage-related securities involve additional risks, such as prepayment risk.
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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. If agency ratings differ, a security will be considered to have received the highest of those ratings, consistent with applicable investment policies. Securities in the Unrated category have not been rated by a rating agency; however, the investment adviser performs its own credit analysis and assigns comparable ratings that are used for compliance with applicable investment policies.
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.
Frequent and active trading of portfolio securities may occur, which may involve correspondingly greater transaction costs, adversely affecting the 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.
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