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Ahead of the Curve: What US resilience means for bond investors
Flavio Carpenzano
Investment Director
Peter Becker
Investment Director

Our latest Ahead of the Curve paper examines opportunities for fixed income investors in what is likely to remain a positive environment for the asset class.


The underlying structural and cyclical resilience of the US has enabled it to avoid recession so far; unusually, economic data now points toward the economy returning to mid-cycle. Combined with a slower decline in inflation, this suggests the Federal Reserve (Fed) will continue to cut interest rates but not as fast or as much as the market initially anticipated.


Meanwhile, this relatively benign backdrop should be positive for risk assets in general; in other words, an environment where yields and spreads could remain range bound and rates relatively volatile. This would mean carry (income) rather than duration is likely to be the dominant component of fixed income results.


Our bias is currently towards higher-quality investment grade credit as we believe this area offers better relative value with spreads having tightened. The spread between A and BBB bonds, shown in the chart, is very tight on a historical basis, which means investors are receiving poor compensation for the additional credit risk taken when moving down in quality.  An example of one of the higher-quality areas where we are finding opportunities is pharmaceuticals. Bonds within this traditionally defensive sector are currently available without sacrificing as much spread versus the broader market as has historically been the case.


Valuations favour higher-quality bonds

Valuations favour higher-quality bonds

Source: Barclays. Data based on Bloomberg indices. Data as at 30 October 2024

Relative value considerations also suggest a bias toward investment grade over high yield with spreads between the two close to the lowest levels for 20 years. That said, we believe the attractive level of yield offered, improved credit quality of the index and relatively short duration of US high yield provides a good source of diversified carry for mixed asset portfolios. Examples of opportunities our research has identified include names within the pharmaceutical and independent energy sectors.


Overall, fundamentals across corporate and emerging markets remain constructive, with the outlook supported by the recent shift in Fed policy. Valuations are tight relative to history, but given the positive outlook for economic growth, the carry component remains compelling with select opportunities in investment grade, high yield and emerging markets.



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. 

Peter Becker is an investment director at Capital Group. He has 27 years of industry experience and has been with Capital Group for five years. Prior to joining Capital, Peter was a managing director in the fixed income product management team at Wellington Management. Before that, he was a portfolio manager at Aberdeen Asset Management. He holds a master's degree from The Ingolstadt School of Management. He also holds the Chartered Financial Analyst® designation. Peter is based in London.


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Capital Group manages equity assets through three investment groups. These groups make investment and proxy voting decisions independently. Fixed income investment professionals provide fixed income research and investment management across the Capital organization; however, for securities with equity characteristics, they act solely on behalf of one of the three equity investment groups.