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8 · 10 INVESTMENT THEMES FOR 2023 Pramod Atluri is a fixed income portfolio manager with 24 years of experience. He is a manager for The Bond Fund of America® Strong income opportunities and a potential economic slowdown could make core bonds the star of a well-diversified portfolio. You can't read the news these days without seeing the word recession. While slowing growth may be a headwind for many asset classes, for core bonds, it's nirvana. Slowing growth, declining inflation, higher yields and a Federal Reserve nearing the end of its hiking cycle all add up to a fantastic opportunity for core bond funds to generate mid-single-digit total returns and, once again, provide ballast to a portfolio. Currently the starting yield of a core bond fund hovers around 4.5%, which is a good indicator of long-term return expectations. As an active manager, I seek to add excess return by managing interest rate sensitivity, sector allocation, security selection and other levers. This could drive expected returns to somewhere between 5% and 6%, with lower volatility than equities. And if a recession does hit, bringing inflation down faster than expected, further upside is possible. Interest rates would likely decline, leading to meaningful bond price appreciation. For example: A 50-basis-point decline in rates translates to a roughly 3% gain, bringing potential total returns for actively managed core bonds closer to 8% to 9% in that scenario. 7. Core strength Source: Bloomberg Index Services Ltd. As of 12/31/22. Past results are not predictive of results in future periods. Total return components of the Bloomberg U.S. Aggregate Index 0 2 4 6 8% 1990–1999 2000–2009 2010–2019 Coupon return Price return Historically, income has dominated long-term total return