Investing for income amid falling rates

OUR TAKE
Our income funds
Featured fund
Insights

TODAY’S CHALLENGE

CPI: +2.4% in September 2024*

Mixed economic indicators and a proactive Federal Reserve create potential opportunities in fixed income markets.

CPI: +2.4% in September 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.

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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)

This bar chart shows the 12 month distribution rates as of September 30, 2024 for six asset classes for F-2 shares. This includes: Morningstar U.S. Intermediate Core Bond category, Morningstar U.S. Intermediate Core-Plus Bond category, American Funds Multi-Sector Income Fund, American High Income Trust, American Funds Emerging Markets Bond Fund and American High Income Municipal Bond Fund. Morningstar U.S. Intermediate Core Bond has a 12-month distribution rate of 3.7%, Morningstar U.S. Intermediate Core-Plus Bond has a 12-month distribution rate of 4.2%, American Funds Multisector Income Fund has a 12-month distribution rate of 6.2%, American High Income Trust has a 12-month distribution rate of 6.5%, American Funds Emerging Markets Bond Fund has a 12-month distribution rate of 6.9% and American High Income Municipal Bond Fund has a 12-month distribution rate of 6.7%.*

AHMFX's tax-equivalent 30-day SEC yields (gross/net) for the F-2 share class at the highest federal tax rate were 6.66%/6.69% as of 10/31/24.

*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. 

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

Bar chart shows American High-Income Trust's top two notable overweights and top two notable underweights, relative to the fund's index, the Bloomberg U.S. Corporate High Yield 2% Issuer Capped Index. The top two overweights are Energy at 13.4% compared to the index's 11.7%, and Brokerage and asset managers at 2.3% compared to the index's 0.9%. The top two underweights are Consumer cyclical at 11.1% compared to the index's 20.4%, and capital goods at 6.0% compared to the index's 10.7%.

Sources: Capital Group, Bloomberg. Data as of 9/30/24.

Overweight

Energy

The sector's credit quality and cash flow have improved following two recent default cycles in 2015 and 2020. Fundamentals remain attractive against a backdrop of continued domestic and global economic growth.

Brokerage, asset managers & exchanges

Financial advisory platforms are growing via consolidation and should benefit from higher interest rates. Investments across the sector have produced an attractive level of cash flow despite recent concerns about cash sweep considerations.

Underweight

Consumer cyclical

Although the fund remains broadly underweight the sector, we maintain idiosyncratic positions in retailers, gaming and leisure. These investments skew toward higher quality issues within these subsectors.

Capital goods

The fundamental outlook is stable across industries like diversified manufacturing. The largest underweight within the sector comes from building materials, which has been the most impacted by decreasing home sales in recent years.

Weightings are relative to the Bloomberg U.S. Corporate High Yield 2% Issuer Capped Index as of 9/30/24.

Some say

Bonds may be challenged as interest rates fall.

 

Insight

Historically, many fixed income sectors have produced above-average returns following the beginning of a rate-cutting cycle. With the Fed likely to cuts rates in December 2024 and in 2025, we believe income-oriented sectors can effectively complement a core bond allocation.

In our view, high yield, emerging markets bonds, investment-grade corporates and other sectors can potentially enable income investors to achieve long-term excess returns even as interest rates fall.

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. View mutual fund expense ratios and returns. View current mutual fund SEC yields.
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 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 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.
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 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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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. 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.
For Class F-2 shares of the funds listed below, the investment adviser has agreed to waive a portion of fund expenses through the date(s) listed below, without which results would have been lower and net expenses higher.
  • American High-Income Municipal Bond Fund (expiration: 10/1/2024)
  • American High-Income Trust (expiration: 12/1/2024)
The investment adviser may elect at its discretion to extend, modify or terminate the waiver as of any noted expiration date.
  1. The distribution rate reflects the fund's past dividends paid to shareholders and may differ from the fund's SEC yield which reflects the rate at which the fund is earning income on its current portfolio of securities. The distribution rate 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.
  2. Calculated by Morningstar. Due to differing calculation methods, the figures shown here may differ from those calculated by Capital Group.
  3. Expense ratios are as of each fund's prospectus/characteristics statement available at the time of publication.
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© 2024 Morningstar, Inc. All Rights Reserved. Some of the information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar, its content providers nor Capital Group are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results. Information is calculated by Morningstar. Due to differing calculation methods, the figures shown here may differ from those calculated by Capital Group.

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 2024 of 27%.