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Chart of the Week

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

January 24, 2023

Luis D. Alvarado, Investment Strategy Analyst

Softening inflation may extend long-term bond rally

The chart compares the relative performance of short, intermediate, and long-term taxable fixed income from October 26, 2022, to January 11, 2023. In that time frame, U.S. long-term taxable fixed income rose 11.38%; U.S. intermediate-term fixed income rose 4.88%; and U.S. short-term fixed income rose 1.5%.Sources: Wells Fargo Investment Institute and Bloomberg. Data as of January 11, 2023. Cumulative total return of short, intermediate, and long-term taxable fixed income from October 26, 2022 to January 11, 2023. U.S. Short-term taxable fixed income = Bloomberg U.S. Aggregate 1-3 Year Bond Index. U.S. Intermediate-term taxable fixed income = Bloomberg U.S. Aggregate 5-7 Year Bond Index. U.S. Long-term taxable fixed income = Bloomberg U.S. Aggregate 10+ Year Bond Index. An index is not managed and not available for direct investment. Past performance is not a guarantee of future results. This chart was excerpted from the Investment Strategy report dated January 17, 2023

Long-term fixed income has recovered over the past two months as yields have declined

U.S. Treasury yields have been trending lower in the first two weeks of the year, influenced largely by the macroeconomic outlook. We believe it should be difficult for the 10-year U.S. Treasury yield to cross above 4% in the near term, especially as inflation has also continued to trend lower and the markets expect the Federal Reserve to pause interest rate hikes in a few months.

On October 26, 2022, we upgraded our guidance on long-term fixed income to most favorable. We guided investors to increase duration exposure (a measure of interest-rate sensitivity) in their portfolios, while also maintaining exposure in short-term fixed income — effectively implementing a barbell strategy. Since then, yields have declined significantly, allowing long-term fixed income (purple line) to experience a strong recovery.

What it may mean for investors

  • For the first half of 2023, we expect the 10-year Treasury yield to remain range bound between 3.4% and 3.9%, but our bias is to the downside.
  • We believe that current yield levels still have the potential to provide opportunities, as we expect lower yields 12 to 18 months from the time of this writing.

Risk Considerations

Forecasts and targets are based on certain assumptions and on views of market and economic conditions which are subject to change.

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.

Definitions

Bloomberg U.S. Aggregate 10+ Year Bond Index is composed of the Bloomberg U.S. Government/Credit Index and the Bloomberg U.S. Mortgage-Backed Securities Index, and includes Treasury issues, agency issues, corporate bond issues, and mortgage-backed securities with maturities of 10 years or more.

Bloomberg U.S. Aggregate 1-3 Year Bond Index is composed of the Bloomberg U.S. Government/Credit Index and the Bloomberg U.S. Mortgage-Backed Securities Index, and includes Treasury issues, agency issues, corporate bond issues, and mortgage-backed securities with maturities of 1-3 years.

Bloomberg U.S. Aggregate 5-7 Year Bond Index is composed of the Bloomberg U.S. Government/Credit Index and the Bloomberg U.S. Mortgage-Backed Securities Index, and includes Treasury issues, agency issues, corporate bond issues, and mortgage-backed securities with maturities of 5-7 years.

An index is unmanaged and not available for direct investment.

General Disclosures

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.

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