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Capital World Bond Fund – ‘N-CSR’ for 12/31/23

On:  Thursday, 2/29/24, at 1:57pm ET   ·   Effective:  2/29/24   ·   For:  12/31/23   ·   Accession #:  51931-24-292   ·   File #:  811-05104

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  As Of               Filer                 Filing    For·On·As Docs:Size             Issuer                      Filing Agent

 2/29/24  Capital World Bond Fund           N-CSR      12/31/23    4:3M                                     Inv Co. of America
          → Capital World Bond Fund ⇒ 20 Classes/Contracts — 1 more Class/Contract

Document/Exhibit                   Description                      Pages   Size 

 1: N-CSR       Annual Certified Shareholder Report by an           HTML   2.73M 
                Investment Company                                               
 4: EX-99.906 CERT  Cert906                                         HTML      8K 
 3: EX-99.CERT  Cert302                                             HTML     20K 
 2: EX-99.CODE ETH  Coe                                             HTML     10K 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM N-CSR

Certified Shareholder Report of

Registered Management Investment Companies

Investment Company Act File Number: 811-05104

Capital World Bond Fund

(Exact Name of Registrant as Specified in Charter)

333 South Hope Street, 55th Floor

Los Angeles, California 90071

(Address of Principal Executive Offices)

Registrant's telephone number, including area code: (949) 975-5000

Date of fiscal year end: December 31

Date of reporting period: December 31, 2023

Becky L. Park

Capital World Bond Fund

6455 Irvine Center Drive

Irvine, California 92618

(Name and Address of Agent for Service)

ITEM 1 – Reports to Stockholders

Capital World Bond Fund®   Annual report for the year ended December 31, 2023

 

Find diverse total
return opportunities
in global bonds

 

The Securities and Exchange Commission has adopted new regulations that will change the content and design of annual and semi-annual shareholder reports beginning in July 2024. Certain types of information, including investment portfolio and financial statements, will not be included in the shareholder reports but will be available online, delivered free of charge upon request, and filed on a semi-annual basis on Form N-CSR.

 

If you would like to receive shareholder reports and other communications from the fund electronically, you may update your mailing preferences with your financial intermediary or enroll in e-delivery at capitalgroup.com (for accounts held directly with the fund).

Capital World Bond Fund seeks to provide you, over the long term, with a high level of total return consistent with prudent investment management. Total return comprises the income generated by the fund and the changes in the market value of the fund’s investments.

This fund is one of more than 40 offered by Capital Group, home of American Funds, one of the nation’s largest mutual fund families. For over 90 years, Capital Group has invested with a long-term focus based on thorough research and attention to risk.

Fund results shown in this report, unless otherwise indicated, are for Class F-2 shares. Class A share results are shown at net asset value unless otherwise indicated. If a sales charge (maximum 3.75%) had been deducted, the results would have been lower. Results are for past periods and are not predictive of results for future periods. Current and future results may be lower or higher than those shown. Prices and returns will vary, so investors may lose money. Investing for short periods makes losses more likely. For current information and month-end results, visit capitalgroup.com.

Refer to page 4 for Class F-2 share results and Class A share results with relevant sales charges deducted. For other share class results, visit capitalgroup.com and americanfundsretirement.com.

Investment results assume all distributions are reinvested and reflect applicable fees and expenses. When applicable, results reflect fee waivers and/or expense reimbursements, without which they would have been lower. Visit capitalgroup.com for more information.

The fund’s 30-day yield as of December 31, 2023, was 4.05% for Class F-2 shares and 3.52% for Class A shares calculated in accordance with the U.S. Securities and Exchange Commission formula. The fund’s distribution rate as of that date was 2.85% for Class F-2 shares and 2.37% for Class A shares. The Class A share results for both reflect the 3.75% maximum sales charge. The SEC yield reflects the rate at which the fund is earning income on its current portfolio of securities, while the distribution rate reflects the fund’s past dividends paid to shareholders. Accordingly, the fund’s SEC yield and distribution rate may differ.

The return of principal for bond funds and for funds with significant underlying bond holdings is not guaranteed. Fund shares are subject to the same interest rate, inflation and credit risks associated with the underlying bond holdings. High-yield and lower rated bonds are subject to greater fluctuations in value and risk of loss of income and principal than investment-grade and 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. Investing in bonds issued outside the U.S. may be subject to additional risks. They include currency fluctuations, political and social instability, differing securities regulations and accounting standards, higher transaction costs, possible changes in taxation, illiquidity and price volatility. These risks may be heightened in connection with investments in developing countries. Refer to the fund prospectus and the Risk Factors section of this report for more information on these and other risks associated with investing in the fund.

Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.

Contents

Fellow investors:

Bonds markets rebounded, rallying on expectations that the U.S. Federal Reserve (Fed), the European Central Bank (ECB) and others are not only done with rate hikes but are planning rate cuts in 2024. Virtually all segments of the bond market generated strong returns in contrast to the unprecedented 2022 downturn. In foreign exchange markets, the already strong U.S. dollar appreciated further for part of the year but reversed course as the Fed started to contemplate rate cuts. By year-end, the dollar registered declines against the euro, the British pound, the Brazilian real and most other currencies.

Against this eventful backdrop, Capital World Bond Fund Class F-2 shares recorded a return of 6.24% for the 12-month period ending December 31, 2023. This result outpaced the Bloomberg Global Aggregate Index, a measure of global investment-grade (rated BBB/Baa and above) fixed income markets, which posted 5.72%. Longer term relative returns have been robust, and the fund has outpaced its benchmark since its inception in 1987. Refer to the table below for long-term results.

Sector/industry allocation decisions contributed, as did security selection to a lesser extent. Country allocation decisions contributed to relative returns, driven by duration management decisions. The fund’s positioning across the yield curve, from short-term to long-term investments, detracted from results. Off-benchmark positions in Brazilian and Greek government bonds contributed to comparative results. A greater than benchmark allocation to Colombian government bonds also contributed. A less-than-benchmark allocation to mortgage-back securities detracted. A less-than-benchmark position in Italian and French government bonds weighed on relative results.

Currency positioning modestly detracted, with the negative impact from currency hedging activities partially offset by

Results at a glance

For periods ended December 31, 2023, with all distributions reinvested

Past results are not predictive of results in future periods.

unhedged currencies. Greater-than-benchmark allocations to the Japanese yen, euro and Thai baht detracted from relative returns. Greater-than-benchmark positions in the Colombian and Mexican peso contributed to results. An off-benchmark allocation to the Brazilian real also contributed.

The fund’s 12-month return fell short of the Lipper Global Income Funds Average, a peer group measure, which was up 6.60% over the period. As a Lipper category, global income includes a broad spectrum of funds, such as those with substantial investments in U.S. high-yield (rated BB/Ba and below) bonds, for example, which benefited from their stronger results, as risk assets soared in the fourth quarter relative to global sovereign and currency returns over the period.

North America

A strong labor market and resilient consumer spending helped the U.S. economy avoid a recession, which once seemed inevitable. At the start of the year, 85% of polled economists predicted a recession would begin before the end of 2023, according to a University of Chicago study. Instead, U.S. gross domestic product (GDP) continued to rise. GDP climbed an annualized 4.9% in the third quarter – the fifth consecutive quarterly gain and the fastest pace since 2021. The unemployment rate remained below 4% throughout the year, touching a low of 3.4% in April.

Inflation declined rapidly throughout the year. The Consumer Price Index slowed to 3.1% in November, a marked improvement from the 6.5% rate at the end of 2022 and the 9.1% peak in June 2022. Core inflation, which excludes food and energy, was 4% in November, matching its slowest pace in over two years.

The Fed slowed its pace of rate hikes and signaled it could cut rates three times in 2024. The central bank raised its target rate by 25 basis points (bps) four times through July but took no further actions in its final three meetings of the year. U.S. bond markets rebounded strongly. The U.S. Treasury yield curve steepened modestly as the 2-year yield fell 18 bps to end at 4.25%, while the 10-year yield ended unchanged at 3.88%.

All major U.S. fixed income sectors posted positive returns. The Bloomberg U.S. Aggregate Index advanced 5.53%. Corporate markets led U.S. bond returns for the year. The Bloomberg U.S. Corporate High Yield 2% Issuer Capped Index and Bloomberg U.S. Corporate Investment Grade Index rose 13.44% and 8.52%, respectively. Both sectors benefited from narrowing spreads, which fell 146 bps for high-yield bonds and 31 bps for investment-grade corporates.

Europe

European bond markets posted solid gains in 2023 as central banks globally signaled an end to their rate-hiking campaigns and inflation eased. Government bond yields declined, spurred by tepid economic growth expectations for the region and the rush to safe havens, such as German bonds. Overall, a fourth quarter rally helped the Bloomberg Euro Global Aggregate Index return 10.95% in 2023.

The ECB kept all three key interest rates steady, with the deposit rate held at 4%, the highest in the central bank’s history. Previously, the Bank of England and the U.S. Federal Reserve kept interest rates unchanged, with the latter indicating that officials may lower rates in 2024. Inflation slowed to 2.4% in the eurozone in November, closer to the ECB’s 2% target and in line with expectations. The decline was attributed to falling energy prices and slowing food inflation. Core inflation, which removes energy and food, softened to 3.6% in November, the lowest since April 2022.

Economic weakness across the eurozone pushed government bond yields lower, prompted by expectations that central banks would shift into easing policy in 2024. The region’s Purchasing Managers’ Index showed economic activity shrinking with manufacturing output falling for the ninth straight month. The downturn was led by France and Germany, two of the region’s largest economies. The benchmark 10-year German yield, a proxy for borrowing costs across Europe, declined 54 bps during the year to 2.02%. France’s equivalent bond yield also similarly declined to 2.56%. A flurry of corporate borrowers rated investment-grade and high-yield issued bonds in the fourth quarter as rates declined, translating to lower borrowing costs.

Other developed markets

The Bank of Japan maintained its loose monetary policy. The bank kept its negative interest rates unchanged, dashing market expectations of a policy reversal after it loosened yield controls on government debt. It relaxed yield caps on 10-year government bonds in October, allowing them to potentially rise above 1%. Inflation inched closer to the bank’s 2% target. Core inflation, which excludes fresh food, fell to 2.5% in November from 4% in December of 2022. While Japan’s central bank has been slow to tighten monetary policy, the bank has loosened its yield curve control policy, leading to higher intermediate and long-term interest rates.

In Australia, helped by a rise in exports, the GDP slightly outpaced estimates in the second quarter, growing 0.4% compared to the first quarter. Growth slowed in the third quarter, however, as rising interest rates weighed on spending. The Reserve Bank of Australia continued its effort to control persistent inflation by hiking its key rate to a 12-year high of 4.35% in November. It left the rate unchanged in December.

Hong Kong investments dropped as a slowing Chinese economy weighed on the city’s economy. Hong Kong emerged from a recession in the first quarter and grew by 4.1% in the third quarter from a year earlier. However, city government officials slashed 2023 GDP growth forecasts in November to 3.2% year over year, citing weak exports and muted private consumption.

Developing markets

Emerging markets bonds experienced a strong 2023, outpacing developed market government bonds and investment-grade credit. Larger cyclical factors continued to drive markets overall. While much of the year provided mixed results, a change in monetary policy stance by the U.S. Federal

Reserve, alongside easing U.S. inflation and resilient growth, boosted returns in the fourth quarter. Both hard and local markets advanced more than 10%, with local markets helped further by overall emerging market currency appreciation. The J.P. Morgan EMBI Global Diversified Index (hard currency) returned 11.09%, and the J.P. Morgan GBI EM Global Diversified Index (local currency) returned 12.70% in U.S. dollar terms.

The vast majority of hard currency markets posted positive returns. At a regional level, African issuers advanced most overall, boosted by strong returns for Zambia and Nigeria. Zambia made progress in its debt restructuring deals despite some setbacks, while Nigerian bonds benefited from some midyear signs of economic reform. Other top performers at a country level included Venezuela, El Salvador, Pakistan and Sri Lanka. Meanwhile, Bolivia and Ecuador were the only countries in the index to post negative returns. Given the supportive backdrop for emerging markets, higher-yielding issuers made stronger gains.

Returns were also largely positive in local markets, with many issuers posting double-digit gains in U.S. dollar terms. Latin American markets led returns in dollar terms, helped in particular by Colombia, Brazil and Mexico. All three countries experienced strong currency gains, as well as positive underlying bond returns, given attractive interest rates and inflation dynamics for the region. While Middle Eastern and African issuers posted positive returns in local terms overall, these gains were offset by currency weakness: The Egyptian pound fell 20% against the U.S. dollar, leading to a dollar return of –45% for Egyptian bonds. Turkish bonds significantly lagged other issuers despite improvements from progress in economic reform following President Erdogan’s re-election in May.

Looking ahead

The portfolio remains cautiously positioned and reflects uncertainty on the range of outcomes. Slowing inflation across many countries should allow global rates to move lower over the medium term. We believe U.S. economic growth may persist at a slower pace while data from China and the euro area suggest improvement. Inflation has broadly trended lower in the U.K. and Europe but may prove more stubborn going forward. Additionally, many economies are headed into an election cycle in 2024, which could lead to an increase in the potential for policy direction changes as well as geopolitical instability.

The outlook for emerging markets debt is reasonably constructive, supported by the somewhat unexpected dovish shift from the Fed in late 2023. That said, caution is still warranted as a busy global election cycle, geopolitical uncertainties, and the potential for weaker global growth could bring higher volatility to the asset class.

The portfolio has a neutral duration relative to the benchmark but is positioned in such a way to potentially benefit from steeper yield curves, where long-term yields are rising at a faster rate than short-term yields.

The portfolio is positioned somewhat defensively across credit sectors, with managers favoring modest overweights in U.S. investment-grade corporate bonds, emerging markets and U.S. high-yield securities.

The portfolio is modestly under-weight the U.S. dollar, with a preference for both developed and emerging markets currencies. Should the U.S. experience lower interest rates or a turn in growth outperformance, investors could pivot to more attractive markets putting downward pressure on the U.S. dollar.

Thank you for your continued commitment to our risk-disciplined and long-term approach to global bond investing.

We look forward to reporting to you again in 12 months.

Cordially,

Philip Chitty
President

February 8, 2024

For current information about the fund, visit capitalgroup.com.

Bloomberg Global Aggregate Index represents the global investment-grade fixed income markets. This index is unmanaged, and its results include reinvested distributions but do not reflect the effect of sales charges, commissions, account fees, expenses or U.S. federal income taxes.

Bloomberg U.S. Aggregate Index represents the U.S. investment-grade fixed-rate bond market. This index is unmanaged, and its results include reinvested dividends and/or distributions but do not reflect the effect of sales charges, commissions, account fees, expenses or U.S. federal income taxes.

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%. This index is unmanaged, and its results include reinvested distributions but do not reflect the effect of sales charges, commissions, account fees, expenses or U.S. federal income taxes.

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. This index is unmanaged, and its results include reinvested distributions but do not reflect the effect of sales charges, commissions, account fees, expenses or U.S. federal income taxes.

The J.P. Morgan Emerging Market Bond Index (EMBI) Global Diversified is a uniquely weighted emerging market debt benchmark that tracks total returns for U.S. dollar-denominated bonds issued by emerging market sovereign and quasi-sovereign entities. This index is unmanaged, and its results include reinvested dividends and/or distributions but do not reflect the effect of account fees, expenses or U.S. federal income taxes.

J.P. Morgan Government Bond Index – Emerging Markets (GBI-EM) Global Diversified covers the universe of regularly traded, liquid fixed-rate, domestic currency emerging market government bonds to which international investors can gain exposure. This index is unmanaged, and its results include reinvested dividends and/or distributions but do not reflect the effect of account fees, expenses or U.S. federal income taxes.

The value of a long-term perspective

How a hypothetical $10,000 investment has grown over the fund’s lifetime.

Fund results shown are for Class F-2 shares and Class A shares. Class A share results reflect deduction of the maximum sales charge of 3.75% on the $10,000 investment.¹ Thus, the net amount invested was $9,625.² Investing for short periods makes losses more likely.

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. Refer to capitalgroup.com for more information on specific expense adjustments and the actual dates of first sale.

The market indexes are unmanaged and, therefore, have no expenses. Investors cannot invest directly in an index.

Past results are not predictive of results for future periods. The results shown are before taxes on fund distributions and sale of fund shares.

Average annual total returns based on a $1,000 investment (for periods ended December 31, 2023)

The total annual fund operating expense ratios are 0.60% for Class F-2 shares and 0.99% for Class A shares as of the prospectus dated March 1, 2024 (unaudited).

Investment results assume all distributions are reinvested and reflect applicable fees and expenses. When applicable, results reflect fee waivers and/or expense reimbursements, without which they would have been lower. Refer to capitalgroup.com for more information.

Investment portfolio December 31, 2023