Capital Ideas^TM

Although fixed income markets enjoyed a strong rally over 2023, bond yields remain at attractive levels, particularly across the key income generating sectors. With markets now reflecting a likely peak in policy rates, the window of opportunity to capture the current lucrative level of income is narrowing.

With starting yields at levels between c.5% and 8%, depending on the sector, the potential for fixed income assets to generate higher income is positive. Furthermore, with inflation having decelerated meaningfully, the yields on offer in real terms are particularly compelling.

Not only are income prospects attractive, starting yields are often a good proxy for the longer-term total returns that can be expected from bonds¹. This implies that, in certain areas of the fixed income markets, investors have the potential to realise compelling positive returns from their bond investments over the longer term, with the benefit of lower volatility than equities.

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. These are: US high yield, US investment grade corporates, emerging market debt and securitised credit. Each sector has its own distinctive characteristics that complement each other to support a stable income stream.

Taking a multi-sector approach that draws on flexibility and diversification while maintaining a balanced risk profile could help capture the income-generating power of bonds, particularly in a new regime of structurally higher rates relative to pre-pandemic levels.

1. Based on average 5-year forward returns for yields at recent levels (31 March 2024) in USD using data back to 2004 for all sectors. Based on average monthly returns for each sector when in a +/- 0.3% range of yield to worst. Sources: Capital Group, Bloomberg