Yes A checkmark with a circle around it close Wells Fargo Advisors on Facebook Facebook symbol, links to WFA Facebook page Wells Fargo Advisors on Linkedin Linkedin symbol, links to WFA Linkedin page
Person with stylus editing a digital chart

Chart of the Week

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

May 11, 2021

Why we favor yield-enhanced fixed-income sectors

call out
Why we favor yield-enhanced fixed-income sectorsSources: Intercontinental Exchange Corp, BofA, and Wells Fargo Investment Institute. Data as of April 20, 2021. This chart was excerpted from Global Macro In Depth (May 6, 2021) “The Biden administration at the 100-day mark”.

Download the report (PDF)

end call out

Rising long-term Treasury yields in the first quarter triggered a sizable loss in Treasury securities with a maturity of more than 15 years

call out

We believe the U.S. economy is on track this year for its strongest growth since 1984, when gross domestic product grew at a 7.2% rate. As the economic recovery gathered momentum in the first quarter of 2021, long-term Treasury yields (orange line) rose and returns on long-term bonds (purple) dropped.

Yields jumped after the Democrats’ sweep of two Georgia Senate seats on January 5 — on the prospect of more aggressive fiscal stimulus — and again following President Biden’s signing of the American Rescue Plan on March 11. A first-quarter increase of just under one percentage point in yields left long-term Treasuries with their biggest quarterly loss in 41 years.

end call out

What it may mean for investors

call out

We positioned our 2021 fixed-income portfolio guidance for just such a rise in long-term yields by favoring yield-enhanced bond sectors, such as preferred and mortgage-backed securities. We also favor municipal revenue bonds — we anticipate that tax-exempt bonds would likely gain even more support if the Biden administration’s proposed increase to the top individual tax rate takes effect.

end call out

Risk Considerations

call out

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. Municipal bonds offer interest payments exempt from federal taxes, and potentially state and local income taxes. Municipal bonds are subject to credit risk and potentially the Alternative Minimum Tax (AMT). Quality varies widely depending on the specific issuer. Municipal securities are also subject to legislative and regulatory risk which is the risk that a change in the tax code could affect the value of taxable or tax-exempt interest income. Mortgage-backed securities are subject to prepayment risk. Changes in prepayments may significantly affect yield, average life and expected maturity of the portfolio. Preferred securities have special risks associated with investing. Preferred securities are subject to interest rate and credit risks. Preferred securities are generally subordinated to bonds or other debt instruments in an issuer's capital structure, subjecting them to a greater risk of non-payment than more senior securities. In addition, the issue may be callable which may negatively impact the return of the security.

An index is unmanaged and not available for direct investment.

end call out
call out

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.

The information contained herein constitutes general information and is not directed to, designed for, or individually tailored to, any particular investor or potential investor. This report is not intended to be a client-specific suitability or best interest analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. The material contained herein has been prepared from sources and data we believe to be reliable but we make no guarantee to its accuracy or completeness.

Wells Fargo Advisors is registered with the U.S. Securities and Exchange Commission and the Financial Industry Regulatory Authority, but is not licensed or registered with any financial services regulatory authority outside of the U.S. Non-U.S. residents who maintain U.S.-based financial services account(s) with Wells Fargo Advisors may not be afforded certain protections conferred by legislation and regulations in their country of residence in respect of any investments, investment transactions or communications made with Wells Fargo Advisors.

Wells Fargo Advisors is a trade name used by Wells Fargo Clearing Services, LLC and Wells Fargo Advisors Financial Network, LLC, Members SIPC, separate registered broker-dealers and non-bank affiliates of Wells Fargo & Company.

end call out