The Fed: Q4 2024
Investment Grade Fixed Income: Yield Opportunities Emerge as Investment Grade Turns the Page
- Compelling income sets the stage for 2025.
- Market dislocation should represent an entry point for long-term investors.
- Security selection becomes critical as quality reaches its cyclical peak.
Investment grade (IG) fixed income confronted rate volatility and price pressure during the fourth quarter but posted positive annual gains for the second consecutive year. (chart 1)
Chart 1: Investment Grade Maturity Focus Yield Comparison
Source: Bloomberg, as of December 31, 2024.
Past performance is no guarantee of future results.Indexes are unmanaged and do not reflect a deduction for fees or expenses. Investors cannot invest directly in an index. Information is subject to change and is not a guarantee of future results.
The Fed lowered its overnight benchmark rate by 50 bps, but the election results shifted the tone of the market from a soft landing and controlled inflation narrative to a Republican-led Congress and the potential for increased fiscal deficits under the incoming Trump administration. In response, the 10-year U.S. Treasury increased by more than 80 bps in the final months of the year, retesting levels last seen in 2023. The economy remains resilient, though inflation remains sticky, tempering expectations for continued easing by the Federal Open Market Committee (FOMC) next year. CNR believes these factors will continue to pressure longer-term rates to remain higher for longer.
More attractive yields have created a unique opportunity for longer-term investors. For example, the yield-to-worst of the broad municipal bond index ended the quarter at about 3.75%, or a taxable-equivalent basis of 6.3%1. AAA benchmark municipal yields have increased between 45 bps and 85 bps across most parts of the municipal bond curve since the beginning of the year. Likewise, IG corporates have experienced an upward shift in their yield curve, with the broad corporate index finishing the year at 5.33%2. The benefit of income cannot be overstated as a key source of forward-return potential within a well-diversified portfolio.
The demand for IG fixed income bonds was relatively consistent throughout 2024 as capital additions into taxable and tax-exempt markets remained healthy. Net cash inflows have been mostly positive, with continued momentum a likely catalyst for further technical support at least through 1Q2025. The supply and demand dynamic across fixed income has been well-balanced, but elevated M&A activity, deal-making, and a robust calendar in municipal bonds could create periods of resistance. However, putting cash to work during periods of volatility should reward investors.
Over the past several quarters, IG quality has generally improved for many issuers, leading to a contraction in credit spreads and tailwind to performance. Better-than-expected GDP growth has broadly strengthened corporate profitability and balance sheets. Key financial indicators, such as interest coverage or net leverage, remain mostly healthy and manageable. Similarly, state and local governments have built up sizeable reserves and maintain ample access to liquidity. While upgrades have exceeded downgrades, quality gains have moderated, and we expect some pressure to surface in some segments of the market. Overall, fundamentals have likely peaked for the cycle, with market and policy changes, such as tax and regulatory reform, forming potential overhangs for credit markets. We continue to closely monitor credit developments and advocate for careful security selection within portfolios as we navigate a more nuanced environment.
Chart 2: Investment Grade 4Q2024 and Annual Total Return
Source: Bloomberg, as of December 31, 2024. Indexes used: The Bloomberg US Treasury Index. Bloomberg Municipal Bond Index. Bloomberg US Corporate Investment Grade Index.
Past performance is no guarantee of future results.Indexes are unmanaged and do not reflect a deduction for fees or expenses. Investors cannot invest directly in an index. Information is subject to change and is not a guarantee of future results.
1Bloomberg, as of December 31, 2024. Bloomberg Municipal Bond Index
2Bloomberg, as of December 31, 2024. Bloomberg US Corporate Investment Grade Index
Important Information
The views expressed represent the opinions of City National Rochdale, LLC (CNR) which are subject to change and are not intended as a forecast or guarantee of future results. Stated information is provided for informational purposes only, and should not be perceived as personalized investment, financial, legal or tax advice or a recommendation for any security. It is derived from proprietary and non-proprietary sources which have not been independently verified for accuracy or completeness. While CNR believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability. Statements of future expectations,estimates, projections, and other forward-looking statements are based on available information and management’s view as of the time of these statements. Accordingly, such statements are inherently speculative as they are based on assumptions which may involve known and unknown risks and uncertainties. Actual results, performance or events may differ materially from those expressed or implied in such statements.
All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met, and investors may lose money. Diversification may not protect against market risk or loss. Past performance is no guarantee of future performance.
There are inherent risks with equity investing. These risks include, but are not limited to stock market, manager, or investment style. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices.
There are inherent risks with fixed income investing. These risks may include interest rate, call, credit, market, inflation, government policy, liquidity, or junkbond. When interest rates rise, bond prices fall.
Bloomberg risk is the weighted average risk of total volatilities for all portfolio holdings. Total Volatility per holding in Bloomberg is ex-ante (predicted) volatility that is based on the Bloomberg factor model.
Municipal securities. The yields and market values of municipal securities may be more affected by changes in tax rates and policies than similar income-bearing taxable securities. Certain investors’ incomes may be subject to the Federal Alternative Minimum Tax (AMT), and taxable gains are also possible. Investments in the municipal securities of a particular state or territory may be subject to the risk that changes in the economic conditions of that state or territory will negatively impact performance. These events may include severe financial difficulties and continued budget deficits, economic or political policy changes, tax base erosion, state constitutional limits on tax increases and changes in the credit ratings.
City National Rochdale, LLC is an SEC-registered investment adviser and wholly-owned subsidiary of City National Bank. Registration as an investment adviser does not imply any level of skill or expertise. City National Bank is a subsidiary of the Royal Bank of Canada.
© 2025 City National Bank. All rights reserved.
Index Definitions
S&P 500 Index: The S&P 500 Index, or Standard & Poor’s 500 Index, is a market-capitalization-weighted index of 500 leading publicly traded companies in the US It is not an exact list of the top 500 US companies by market cap because there are other criteria that the index includes.
Bloomberg Municipal Bond Index: The Bloomberg US Municipal Bond Index measures the performance of investment grade, US dollar-denominated, long-term tax-exempt bonds.
Bloomberg Municipal High Yield Bond Index: The Bloomberg Municipal High Yield Bond Index measures the performance of non-investment grade, US dollar-denominated, and non-rated, tax-exempt bonds.
Bloomberg Investment Grade Index: The Bloomberg US Investment Grade Corporate Bond Index measures the performance of investment grade, corporate, fixed-rate bonds with maturities of one year or more.
The Bloomberg US Treasury Index measures US dollar-denominated, fixed-rate, nominal debt issued by the US Treasury.
Bloomberg Municipal Bond Muni Short (1-5) Index 1-5 year maturities of the US Municipal bond index.
The Bloomberg Muni Intermediate Index is an unmanaged index that tracks the performance of intermediate US government securities.
The Bloomberg US Government/Credit 1-5 Year Index tracks USD-denominated, investment grade, fixed-rate bonds, including treasuries, government-related and corporate issues. The Index includes securities with at least one, and up to, but not including, five years until final maturity.
The taxable Intermediate Government/Credit Credit Index measures the investment grade, US dollar-denominated, fixed-rate, taxable corporate and government-related bond markets with a maturity greater than 1 year and less than 10 years.
The Morningstar LSTA US Leveraged Loan 100 Index is a daily tradable index for the U.S. market that seeks to mirror the market-weighted performance of the largest institutional leveraged loans. It represents the 100 largest and most liquid issues in the institutional loan universe and is a cornerstone for measuring the pulse of the leveraged loan market.
The Bloomberg US High Corporate Bond Yield to Worst Index represents the semi-annual yield to worst of the ICE BofA US High Yield Index, which tracks the performance of US dollar denominated below investment grade rated corporate debt publicly issued in the US domestic market.
The ICE BofA High Yield Emerging Markets Corporate Plus Index is a subset of the ICE BofA Emerging Markets Corporate Plus Index, which includes only securities rated BB1 or lower.
The Palmer Square CLO Debt Index is a rules-based observable pricing and total return index for collateralized loan obligation (CLO) debt for sale in the United States.
Yield to worst (YTW) 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.
Indexes are unmanaged and do not reflect a deduction for fees or expenses. Investors cannot invest directly in an index.
Definitions
Yield to Worst (YTW) is the lower of the yield to maturity or the yield to call. It is essentially the lowest potential rate of return for a bond, excluding delinquency or default.
P/E Ratio: The price-to-earnings ratio (P/E ratio) is the ratio for valuing a company that measures its current share price relative to its earnings per share (EPS).
The 4P analysis is a proprietary framework for global equity allocation. Country rankings are derived from a subjective metrics system that combines the economic data for such countries with other factors including fiscal policies, demographics, innovative growth and corporate growth. These rankings are subjective and may be derived from data that contain inherent limitations. MSCI Emerging Markets Asia Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the Asian emerging markets.
The Magnificent Seven stocks are a group of high-performing and influential companies in the U.S. stock market: Alphabet, Amazon, Apple, Meta Platforms, Microsoft, NVIDIA, and Tesla.
City National Rochdale Proprietary Quality Ranking formula: 40% Dupont Quality (return on equity adjusted by debt levels), 15% Earnings Stability (volatility of earnings), 15% Revenue Stability (volatility of revenue), 15% Cash Earnings Quality (cash flow vs. net income of company) 15% Balance Sheet Quality (fundamental strength of balance sheet).
*Source: City National Rochdale proprietary ranking system utilizing MSCI and FactSet data. **Rank is a percentile
ranking approach whereby 100 is the highest possible score and 1 is the lowest. The City National Rochdale Core compares the weighted average holdings of the strategy to the companies in the S&P 500 on a sector basis. As of September 30, 2022. City National Rochdale proprietary ranking system utilizing MSCI and FactSet data.
BPS: A basis point (BPS) is used to indicate changes in the interest rates of a financial instrument. Basis points are typically expressed with the abbreviations “bp,” “bps,” or “bips.”
A consensus estimate is a forecast of a public company’s projected earnings based on the combined estimates of all equity analysts that cover the stock.
Bureau of Labor Statistics(BLS): The BLS is a federal agency that collects and disseminates important information about labor, wages, prices, and productivity.
Gross domestic product (GDP) is the total monetary or market value of all the finished goods and services produced within a country’s borders in a specific time period.
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