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Chart of the Week

Wells Fargo Investment Institute - May 11, 2021

Why we favor yield-enhanced fixed-income sectors

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

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.

What it may mean for investors

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.

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COTW: Why we favor yield-enhanced fixed-income sectors

Sources: Intercontinental Exchange Corp, BofA, and Wells Fargo Investment Institute. Data as of April 20, 2021.