Chart of the Week
Weekly chart using economic data to address timely market topics from the Wells Fargo Investment Institute Global Investment Strategy team.
Brian Rehling, CFA, Co-Head of Global Fixed Income Strategy
Opportunity in a Flatter Yield Curve
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.
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.
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