Amidst volatility, bond markets were generally positive
Bond markets were generally positive amid rising volatility
David Bradin
Investment director
Catherine Magyera
Investment product manager
Key takeaways for the quarter ended March 31, 2025
- Fixed income markets were generally positive to start the year. Rising concerns around U.S. policy and tariffs, and softening economic indicators, led to an uptick in equity market volatility. The U.S. Federal Reserve (Fed) hit pause on interest rate cuts in the quarter as it revised its outlook for inflation upward and its outlook for the economy downward. The Fed has indicated it is seeking clarity on new policies from the Trump administration before it makes any further decisions. Amidst this, U.S. Treasury and mortgage-backed securities delivered some of the highest returns for the quarter compared to other sectors.
- Over five- and ten-year periods, the majority of fixed income American Funds (Class F-2) continued to deliver positive absolute returns and positive relative returns compared to their primary benchmarks.
- We believe important portfolio roles for fixed income funds include income, inflation protection, capital preservation and diversification from equities. Capital Group offers investments that balance these roles across fixed income mutual funds and exchange-traded funds (ETFs).*
Fixed income markets were generally positive to start the year. After several months of positive momentum following the November 2024 U.S. presidential election, rising uncertainty around the impact of policy changes (and especially potential tariffs) led to volatility in equity markets.
Rapidly evolving developments in U.S. policy and potential tariffs, as well as soft indicators of potential weakness in U.S. economic growth, led to equity market volatility in the first quarter as investors looked to reduce risk. The implementation and reversal of tariffs in early February, followed in March by the lead-up to broader sweeping tariffs announcements, contributed to the uncertainty. This came to a head post quarter-end as announcements of global tariffs on April second led to a pronounced risk off move in markets. The Fed hit pause on interest rate cuts in the first quarter as it revised its outlook for inflation upward and its outlook for the economy downward. The Fed has been indicating it is seeking clarity on new policies from the Trump administration before making any further decisions. Credit spreads across most fixed income sectors widened modestly in the first quarter. Bonds with longer duration generally outperformed their shorter duration counterparts within the taxable bond space. (Duration indicates a bond fund’s sensitivity to interest rates; generally, lower duration indicates less sensitivity.) The Bloomberg U.S. Aggregate Index returned 2.78% for the quarter.
Treasury yields fell across most of the curve. The 2-year, 5-year, 10-year and 30-year Treasury yields decreased 36 basis points (bps), 43 bps, 37 bps and 21 bps, respectively. The 10-year Treasury yield ended the quarter at 4.21%, and the 2-year Treasury yield ended the quarter at 3.89%. Messaging from the Fed suggests the central bank will remain on pause until there is clear data showing the impact of new U.S. policies on issues like immigration and trade. Inflation data showed pricing pressures softening slightly, while the labor market remained steady. The Consumer Price Index rose at an annualized 2.8% in February, down from 2.9% at the end of December 2024. Core inflation, which excludes food and energy, fell to 3.1% in February from 3.2% in December 2024. Meanwhile, the unemployment rate stayed flat at 4.1% in February. Changes around tariffs, immigration, tax and regulation add to uncertainty in the market and could impact inflation and employment in either direction. Despite these complicating factors, we believe the Fed likely remains inclined to cut rates going forward as broader economic challenges and labor market weakness could lead to more cuts.
Credit spreads across high-yield and investment-grade (BBB/Baa and above) markets modestly widened this quarter. Investment-grade credit spreads ended the quarter at 94 bps over Treasuries, wider by 14 bps compared to the previous quarter-end. High-yield credit spreads ended the quarter at 347 bps over Treasuries, wider by 60 bps from December 31, 2024. The yield to worst on the Bloomberg U.S. Corporate High Yield 2% Issuer Capped Index was 7.73% as of the end of March.
Sources: Bloomberg Index Services Ltd., RIMES. As of 3/31/25. Past results are not predictive of results in future periods.
Source: Bloomberg Index Services Ltd. As of 3/31/25. Past results are not predictive of results in future periods.
U.S. fixed income markets were generally positive in the first quarter amidst equity volatility driven in part by policy and tariff uncertainty and softening growth indicators
U.S. Treasury and mortgage-backed securities delivered the strongest results as risk off moves from investors bolstered bond prices. The Bloomberg U.S. Aggregate Index, which represents the broad bond market, returned 2.78%. In taxable bond sectors, longer duration bonds generally outpaced their shorter duration counterparts. Against this backdrop, the majority of our fixed income portfolios experienced positive absolute returns. In terms of benchmark relative results, 20 of our 27 fixed income mutual funds and ETFs delivered results in line (within 10 bps) or ahead of their primary benchmarks.
Anchoring your portfolio with disciplined fixed income mutual funds and ETFs
While U.S. economic fundamentals appear to remain solid, leading indicators such as equity markets and consumer and business sentiment have deteriorated. Additionally, heightened U.S. policy ambiguity (including the announcement of reciprocal tariffs) has raised the degree of uncertainty in the economic outlook. Given this, we are focused on building resilience and balance in portfolios. We believe a balanced approach across diversified sources of income from multiple credit sectors and positioning for a further steepening of the yield curve will remain key. 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 5- and 10-year periods (by 74 bps and 43 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 (49 bps).
CGCP — Capital Group Core Plus Income ETF can help anchor a portfolio while pursuing a consistent income. CGCP (net asset value, “NAV”) lagged 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 (105 bps), 3-year (20 bps), 5-year (35 bps) and 10-year (14 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 14 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 (36 bps) and 5-year (68 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) lagged its primary index, the Bloomberg U.S. Aggregate Index, by 126 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:
- Interest rates: Positioning for a steeper yield curve offers favorable risk-reward dynamics. A curve steepener remains our primary risk-off hedge to complement risk exposures elsewhere. In our view, rates may be range-bound and our steepener position could benefit in either a worse-than-expected economic slowdown or a higher-yield debt scare. We view duration more positively given heightened downside risks. An underweight position in global duration could be beneficial as fiscal stimulus in non-U.S. developed markets might cause non-U.S. rates to lag those in the U.S.
- Within credit, diversified exposure up-in-quality with a tilt towards more defensive areas of the market to reflect a backdrop of increased macro and policy uncertainties. Though credit fundamentals appear sound, volatility and downside risks are likely to remain elevated. High yield and emerging markets are attractive from a yield perspective and for their diversification benefits in portfolios.
- Mortgage-backed securities and senior structured credit: seeking a balance of higher credit quality and attractive relative income. The secured nature of these areas may offer high-quality exposure without giving up potential income, and therefore may offer another means of diversifying sources of income with a higher quality tilt.
* This commentary excludes the American Funds Portfolio Series and American Funds Insurance Series® fixed income mutual funds.
Fund results and analysis
All mutual fund returns are for Class F-2 shares unless stated otherwise.
Results as of March 31, 2025. 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.
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 mutual fund prospectuses and summary prospectuses, which can be obtained from a financial professional, and should be read carefully before investing.
Capital Group exchange-traded funds (ETFs) are actively managed and do not seek to replicate a specific index. ETF shares are bought and sold through an exchange at the then current market price, not net asset value (NAV), and are not individually redeemed from the fund. Shares may trade at a premium or discount to their NAV when traded on an exchange. Brokerage commissions will reduce returns. There can be no guarantee that an active market for ETFs will develop or be maintained, or that the ETF's listing will continue or remain unchanged.
As nondiversified funds, 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.
Investment results assume all distributions are reinvested and reflect applicable fees and expenses. Returns for one year or less are not annualized, but calculated as cumulative total returns.
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.
There may have been periods when the funds have lagged the index(es). Certain market indexes are unmanaged and, therefore, have no expenses. Investors cannot invest directly in an index.
The Bloomberg U.S. Aggregate Index represents the U.S. investment-grade fixed-rate bond market. 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.
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.
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.
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 any of the rating agencies referenced above; 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.
BLOOMBERG® is a trademark and service mark of Bloomberg Finance L.P. and its affiliates (collectively “Bloomberg”). Bloomberg or Bloomberg’s licensors own all proprietary rights in the Bloomberg Indices. Neither Bloomberg nor Bloomberg’s licensors approves or endorses this material, or guarantees the accuracy or completeness of any information herein, or makes any warranty, express or implied, as to the results to be obtained therefrom and, to the maximum extent allowed by law, neither shall have any liability or responsibility for injury or damages arising in connection therewith.
© 2025 Morningstar, Inc. All rights reserved. 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 nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results.
Information has been obtained from sources believed to be reliable but J.P. Morgan does not warrant its completeness or accuracy. The Index is used with permission. The Index may not be copied, used, or distributed without J.P. Morgan's prior written approval. Copyright 2025, J.P. Morgan Chase & Co. All rights reserved.
This content, developed by Capital Group, home of American Funds, should not be used as a primary basis for investment decisions and is not intended to serve as impartial investment or fiduciary advice.
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. This information is intended to highlight issues and should not be considered advice, an endorsement or a recommendation.
All Capital Group trademarks are registered trademarks owned by The Capital Group Companies, Inc. or an affiliated company. All other company and product names mentioned are the trademarks or registered trademarks of their respective companies.
Use of this website is intended for U.S. residents only.
Capital Client Group, Inc.