Bar chart highlighting that these selected fixed-income asset classes: 3-month Treasury bills, intermediate and long-term U.S Treasury bonds and U.S. municipal bonds have managed to display average annualized positive returns in the 6, 12 and 18-months after the last Fed rate hike in the past seven Fed hiking cycles.
Sources: Bloomberg and Wells Fargo Investment Institute, as of December 31, 2023. 3-month Treasury bill: ICE BofA 3-Month Treasury Bill Index measures the performance of a single issue of outstanding treasury bill which matures closest to, but not beyond, three months from the rebalancing date. U.S. Intermediate-term Treasury: Bloomberg U.S. Intermediate-Term Treasury Index measures U.S. dollar-denominated, fixed-rate, nominal debt issued by the U.S. Treasury with maturities of at least 1 year and less than 10 years to maturity. U.S. long-term Treasury: Bloomberg U.S. Long-Term Treasury Index measures U.S. dollar-denominated, fixed-rate, nominal debt issued by the U.S. Treasury with 10 years or more to maturity. Municipals: Bloomberg U.S. Municipal Bond Index is an index of a broad range of investment-grade municipal bonds that measures the performance of the general municipal bond market. Chart shows performance over the 6-month, 12-month, and 18-month periods following the last hike in the federal funds rate in the previous seven tightening cycles by the U.S. Federal Reserve. (Last hike dates were: February 15, 1980; May 5, 1981; February 24, 1989; February 1, 1995; May 16, 2000; June 29, 2006; and December 19, 2018.) Past performance is not a guarantee of future results. Indexes are unmanaged, do not reflect the deduction of fees or expenses, and are not available for direct investment. 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.
Key Takeaways
- Longer-term bond yields tend to peak near the end of a Fed’s tightening cycle and are likely to outperform once the Fed pivots to rate cuts.
- We believe that increasing exposure in long-term fixed income can provide an advantage before opportunities appear in lower-rated corporate bonds.