“Although earnings growth may be slowing, corporate balance sheets remain in good shape, with generally low levels of debt. Over the past several years, these healthy fundamentals have translated into higher average levels of quality and fewer defaults within the investment-grade corporate, high-yield and securitised credit sectors,” say Capital Group’s Fixed Income Investment Directors Greg Garrett and David Bradin.
“Outside of the US, economic fundamentals among most emerging markets are still strong as well, as emerging markets growth rates continue to exceed their developed markets counterparts,” explains Greg Garrett, a Fixed Income Investment Director at Capital Group.
“Taken together, these US and emerging markets fundamentals provide a strong foundation for continued high income among many sectors of the bond market. But with the risk-on sentiment 2025 has generated so far, spreads across many of these sectors have approached or exceeded their tightest levels in the past decade. As a result, these spreads have led some fixed income investors to be concerned that many sectors have become expensive.”
“While these concerns are understandable, a closer look at high yield, investment-grade corporates, emerging markets and securitised credit reveals that starting yields in these sectors are still above 10-year averages, indicating that income levels within these sectors remain very attractive,” continues David Bradin, a Fixed Income Investment Director at Capital Group.
“Given the average duration of these sectors, we believe these high starting yields may persist for some time. Fortunately, these high starting yields also provide a cushion against negative total returns should spreads eventually widen to more historically average levels.”
“In addition, investors who have typically generated most of their portfolio income through dividend-paying stocks may be surprised to learn that the yield to worst on the US investment-grade sector (this is those bonds with a rating of BBB/Baa and above) and high-yield (with a rating of BB/Ba and below) sectors currently exceeds the S&P 500 Index earnings yield. This indicates that income-oriented investors are not earning a risk premium for owning equities,” say Capital Group’s fixed income specialists.
Yield on US IG corporates exceeds S&P 500 earnings yield
“Within this environment, we believe that active management and diligent security selection remain key parts of a successful long-term fixed income investment strategy, conclude Capital Group’s investment directors.
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