Chart of the Week

Long-term Treasury yields are among the highest levels investors have seen in years. However, we believe investors should look beyond headline yields. Income alone does not necessarily imply strong return potential, particularly when longer-maturity bond prices remain highly sensitive to changes in interest rates and other factors.

The chart shows how long-term Treasury yields are elevated relative to recent history. If rates rise further from current levels, price declines could offset much of the income investors receive. The additional yield available from longer maturities appears limited relative to the substantial increase in interest-rate sensitivity associated with these bonds.

We maintain an unfavorable view on Long Term Taxable Fixed Income, as we do not believe it currently offers a compelling risk-reward tradeoff. By contrast, Short Term Taxable Fixed Income, where we are favorable, has significantly less exposure to rising yields. In our view, selectively adding short-term investment-grade credit may provide a more efficient way to enhance portfolio yield. While credit exposure carries its own risks, we currently view those risks as better compensated than the interest rate exposure associated with maturities longer than seven years.

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.

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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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