Capital Group: In an uncertain environment, income remains attractive
27 NOV, 2025
By Joanna Piwko from RankiaPro Europe
By Flavio Carpenzano, Asset Class Lead Fixed Income, Europe and Asia at Capital Group
Despite the ongoing uncertainties surrounding the U.S. economy, we believe that the high initial yields offered by investment-grade corporate bonds, high yield, emerging markets (EM) debt, and securitized credit continue to represent an attractive opportunity for investors seeking to generate a meaningful level of income.
Even if spreads widen from current levels, these initial yields can offer long-term bond investors a margin of protection against negative total returns — while also serving as an alternative for equity investors who wish to reduce their exposure to higher-risk asset classes. Ultimately, elevated starting yields can remain a compelling solution for income-oriented investors, despite the uncertainties on the horizon.
Investment grade: new issuance and solid yields strengthen the technical backdrop
In our view, the technical backdrop for U.S. investment-grade corporate bonds highlights the market’s strong demand for the sector. According to JP Morgan data, gross new issuance reached USD 910 billion in the first half of 2025 — the second-highest level ever recorded for a first half. Net new issuance, after accounting for maturities and coupon payments, totaled USD 317 billion.
Although market projections indicate a possible decline in both gross and net issuance in the second half of the year, this could create a demand-supply imbalance that may support spreads in the coming months.
Since the beginning of the year, U.S. IG corporate yields have hovered between 4.5% and 5.5%, while U.S. equity price-to-earnings ratios remain near historical highs. In this environment, we believe that earning around 5.0% in U.S. IG corporate bonds is an interesting opportunity — especially when compared with the earnings yield of S&P 500 components.
We see particular value in the pharmaceutical sector, where several companies have issued debt to fund acquisitions and are now using free cash flow to reduce leverage. We also identify selective opportunities in the insurance and utilities sectors.
High yield: fundamentals and technical factors support valuations
Since 2020, with the gradual improvement in the credit quality of the high-yield universe, the sector’s fundamentals have remained solid: both leverage ratios and coverage metrics continue to sit below long-term averages.
That said, earnings growth within S&P 500 companies may slow, as tariffs and higher interest rates weigh on consumer spending and corporate activity, including M&A and capital-structure adjustments.
Despite a slight uptick in issuance, technicals remain supportive, as M&A activity has stayed relatively muted and refinancing needs remain low. From a credit-quality perspective, EBITDA margins have held largely steady over the past five quarters, reflecting the overall stability of high-yield fundamentals.
We continue to balance exposure between higher-quality high-yield issuers and idiosyncratic ideas from across the sector. While we remain underweight in cyclical consumer goods, we have recently found opportunities in the auto sector, where some issuers were trading at valuations far from fair value. In addition, some of our portfolio managers have selectively increased exposure to liquefied natural gas (LNG) operators. We believe reshoring trends and early-stage data-center development could support LNG demand even if global economic growth slows.
Emerging-market bonds: attractive yields and appreciation potential
In general, EM bonds offer higher nominal and real yields compared with developed markets, along with potential for capital appreciation if central banks cut policy rates. EM fundamentals have shown resilience despite recent volatility and policy uncertainty. External balances (excluding certain frontier markets) remain solid, while inflation has fallen thanks to tight monetary policy.
Although fiscal positions remain generally weak, many EM countries have extended their debt maturities or are issuing more bonds in local-currency markets. At the same time, several countries have room to lower policy rates, supporting growth and helping offset the negative effects of higher U.S. tariffs.
We find local-currency EM bonds particularly attractive, given their high real yields and their potential for appreciation should central banks cut rates. Local currencies may also benefit relative to the dollar if growth differentials remain favorable.
Valuations in the hard-currency EM bond market remain mixed, but we are identifying opportunities among higher-yielding sovereigns. Additionally, lower U.S. rates and continued IMF support could further strengthen fundamentals.
Securitized credit: attractive risk/return opportunities
In our view, the securitized-credit market continues to offer investors high-quality income potential, with good spread levels relative to other fixed-income sectors. We find agency mortgage-backed securities (MBS) particularly attractive due to their relative valuations and strong liquidity.
Active coupon selection remains important, however, as the sector currently exhibits a wide range of risk-return profiles, with coupons spanning from 1.0% to nearly 8.0%. We favor higher-coupon mortgages, which typically offer lower interest-rate sensitivity and higher nominal yields than lower-coupon alternatives.
Overall, we believe this segment of the agency MBS market offers compelling income and liquidity compared with other areas of the bond market and has historically shown greater resilience during market downturns.
