Chart of the Week

Weekly chart using economic data to address timely market topics from the Wells Fargo Investment Institute Global Investment Strategy team.

April 18, 2018

Brian Rehling, CFA, Co-Head of Global Fixed Income Strategy

Opportunity in a Flatter Yield Curve

Opportunity in a Flatter Yield CurveSources: Bloomberg, April 3, 2018. Ten-Year Treasury Constant Maturity and the Two-Year Constant Maturity Indexes are published by the Federal Reserve Board and are based on the average yield of a range of Treasury securities, all adjusted to the equivalent of a 10-year maturity and the equivalent of a two-year maturity. Yields represent past performance and fluctuate as market conditions change. Past performance is no guarantee of future results. An index is unmanaged and not available for direct investment. This chart was excerpted from the Investment Strategy report dated April 9, 2018.

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The yield curve (10 year – 2 year) has been flattening throughout the Fed tightening cycle

In recent years, as the Federal Reserve (Fed) has transitioned to tighter monetary policy, we have seen a meaningful flattening of the interest-rate curve. Still, it is important to note that the interest-rate curve between 2- and 10-year Treasury securities remains positively sloped, with a 50-basis point (0.50%) difference between 2-and 10-year Treasury yields. This curve steepness suggests that the current moderate growth environment should remain in place.

We expect that investors will face further interest-rate curve flattening in the future as the Fed continues to raise short-term rates in response to full employment and modestly rising inflation pressures.

What it May Mean for Investors

Higher short-term interest rates could present investors with an attractive risk/reward opportunity. Under such a scenario, short-term positions offer the potential for higher yields with limited price volatility. We view the recent spread widening in short-term corporate securities as an opportunity for investors looking for added yield in high quality short-term paper.

Risk Considerations

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 interest rate, credit/default, liquidity, inflation and other risks. Prices tend to be inversely affected by changes in interest rates.

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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