Chart of the Week

Bonds are often viewed as stable investments, but rising rates have lowered the prices and returns on bonds investors already hold, prompting some investors to reassess their long-term holdings. Longer-term bonds have the less favorable rate locked in for longer, and so are more sensitive to yield changes. As shown in the chart, rising yields over the past decade have weighed heavily on long-term bond returns.

While we remain cautious on long-term U.S. taxable fixed income, investors need not abandon bonds entirely. Higher yields may create opportunities to reposition portfolios and better align interest-rate risk with investment objectives.

Depending on an investor’s individual circumstances, losses on long-term bonds may be realized to offset taxable gains. This process is called tax-loss harvesting. Proceeds from this sale can then be reinvested into shorter-duration¹, investment-grade bonds that now offer higher yields and lower interest-rate sensitivity. This approach can help maintain income while reducing risk. For investors who do not need immediate liquidity, holding high-quality bonds to maturity remains a viable option, as principal is expected to be repaid, provided the issuer remains financially sound.

¹ Duration is a measure of interest-rate sensitivity.

Each asset class has its own risk and return characteristics. The level of risk associated with a particular investment or asset class generally correlates with the level of return the investment or asset class might achieve. Bonds are subject to market, interest rate, price, credit/default, liquidity, inflation and other risks. Prices tend to be inversely affected by changes in interest rates. Although Treasuries are considered free from credit risk they are subject to other types of risks. These risks include interest rate risk, which may cause the underlying value of the bond to fluctuate.

Morningstar U.S. 10+ Year Core Bond Index measures the performance of fixed-rate, investment-grade USD-denominated securities with maturities greater than ten years.

An index is unmanaged and not available for direct investment.

Global Investment Strategy (GIS) is a division of Wells Fargo Investment Institute, Inc. (WFII). WFII is a registered investment adviser and wholly owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.

The information in this report was prepared by Global Investment Strategy. Opinions represent GIS’ opinion as of the date of this report and are for general information purposes only and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally. GIS does not undertake to advise you of any change in its opinions or the information contained in this report. Wells Fargo & Company affiliates may issue reports or have opinions that are inconsistent with, and reach different conclusions from, this report.

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