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With recent interest rates above or approaching pre-2008 levels but approaching a peak, in our view, fixed income appears attractive again. Short-term interest rates have risen over the past year, with 12-month U.S. Treasury yields increasing from 0.1% a year ago to over 4.0% at the time of this writing. If the Federal Reserve (Fed) cuts rates next year, as we expect, short-term rates should decline.

We believe long-term yields should be close to peak levels, so we prefer to add to longer-term bonds. Once yields peak and inflation eases, as we expect, long-term bonds should become more attractive versus shorterterm bonds.

• Our 2023 year-end target range for the federal funds rate is 3.50% – 3.75%, slightly lower than today’s range. Our forecast anticipates multiple policy-rate reductions after rates reach a peak of 4.50% early in 2023. Our 2023 year-end target range for the 30-year U.S. Treasury yield is 3.50% – 4.00%.
• We are most favorable on U.S. Long Term Taxable Fixed Income, and favorable on U.S. Short Term Taxable Fixed Income, but we remain unfavorable on High Yield Taxable Fixed Income. While yields may look attractive, at this stage in the cycle we prefer that investors increase duration before considering lower-quality debt.

Forecasts are not guaranteed and based on certain assumptions and on views of market and economic conditions which are subject to change.

Investments in fixed-income securities are subject to interest rate, credit/default, liquidity, inflation and other risks. Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline in the bond’s price. Credit risk is the risk that an issuer will default on payments of interest and principal. This risk is higher when investing in high yield bonds, also known as junk bonds, which have lower ratings and are subject to greater volatility. If sold prior to maturity, fixed income securities are subject to market risk. All fixed income investments may be worth less than their original cost upon redemption or maturity.

U.S. government securities are backed by the full faith and credit of the federal government as to payment of principal and interest. Unlike U.S. government securities, agency securities carry the implicit guarantee of the U.S. government but are not direct obligations. Payment of principal and interest is solely the obligation of the issuer. If sold prior to maturity, both types of debt securities are subject to market risk.

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.

Investing in foreign securities presents certain risks not associated with domestic investments, such as currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share price volatility. These risks are heightened in emerging markets.

Bloomberg 1-3 Month U.S. Treasury Bill Index includes all publicly issued zero-coupon U.S. Treasury Bills that have a remaining maturity of less than 3 months and more than 1 month, are rated investment grade, and have $250 million or more of outstanding face value. In addition, the securities must be denominated in U.S. dollars and must be fixed rate and non-convertible.

Bloomberg Municipal High Yield Index measures the non-investment grade and non-rated U.S. dollar-denominated, fixed-rate, tax-exempt bond market within the 50 United States and four other qualifying regions (Washington DC, Puerto Rico, Guam and the Virgin Islands).

Bloomberg U.S. Corporate Bond Index includes publicly issued U.S. corporate and Yankee debentures and secured notes that meet specified maturity, liquidity, and quality requirements.

Bloomberg U.S. Corporate High Yield Index covers the universe of fixed-rate, noninvestment-grade debt.

JPMorgan Emerging Markets Bond Index Global (EMBI Global) which currently covers 27 emerging market countries. Included in the EMBI Global are U.S.-dollardenominated Brady bonds, Eurobonds, traded loans, and local market debt instruments issued by sovereign and quasi-sovereign entities.

JPMorgan GBI Global ex-US Index in USD is a representative of the total return performance in U.S. dollars on an unhedged basis of major non-U.S. bond markets.

An index is unmanaged and not available for direct investment.

Investment Grade bonds - A rating that indicates that a municipal or corporate bond has a relatively low risk of default. Bond rating firms, such as Standard & Poor's, use different designations consisting of upper- and lower-case letters 'A' and 'B' to identify a bond's credit quality rating. 'AAA' and 'AA' (high credit quality) and 'A' and 'BBB' (medium credit quality) are considered investment grade. Credit ratings for bonds below these designations ('BB', 'B', 'CCC', etc.) are considered low credit quality, and are commonly referred to as "junk bonds".

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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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