| Fixed income asset | Yield as of Dec. 31, 2023 |
|---|---|
| T-bills | 5.26% |
| 2-year U.S. Treasury note | 4.25% |
| 5-year U.S. Treasury note | 3.85% |
| 10-year U.S. Treasury note | 3.88% |
| 30-year U.S. Treasury bond | 4.03% |
| IG taxable fixed Income | 4.53% |
| IG corporates | 5.06% |
| High yield | 7.59% |
| Asset-backed securities | 4.96% |
| Mortgage-backed securities | 4.68% |
| Municipals | 3.22% |
Bar chart showing the impact on return of a 1% rise or fall in interest rates for the following fixed income instruments or indexes: T-bills, 2-year U.S. Treasury note, 5-year U.S. Treasury note, 10-year U.S. Treasury note, 30-year U.S. Treasury bond, IG taxable fixed Income, IG corporates, High yield, Asset-backed securities, Mortgage-backed securities, Municipals. If interest rates were to rise 1%, returns would fall for most assets shown except T-bills, the 2-year Treasury, high yield, and asset-backed securities. If interest rates were to fall 1%, returns would increase for all assets shown. The impact to return of a 1% move in interest rates longer-dated instruments like the 10-year and 30-year Treasuries would be larger than the impact for shorter-dated instruments like T-bills and the 2-year Treasury.
Definitions
Bloomberg U.S. Aggregate 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.
Bloomberg U.S. Asset Backed Securities Index measures the investment-grade market of US Credit Card, Auto and Student Loan asset backed securities deals.
Bloomberg U.S. Corporate Bond Index measures the performance of the investment-grade corporate bond market.
Bloomberg U.S. Corporate High Yield Bond Index covers the U.S. dollar-denominated, non-investment grade, fixed-rate, taxable corporate bond market.
Bloomberg U.S. Mortgage Backed Securities Index includes agency mortgage backed pass-through securities (both fixed-rate and hybrid ARM) guaranteed by Ginnie Mae (GNMA), Fannie Mae (FNMA), and Freddie Mac (FHLMC).
Bloomberg 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.
Bloomberg U.S. Treasury Bills (1–3 Month) Index is representative of money markets.
Sources: Bloomberg and Wells Fargo Investment Institute, as of December 31, 2023. For illustrative purposes only. T-bills (Treasury bills): Bloomberg U.S. Treasury Bills (1–3M) Index, Investment-grade (IG) taxable fixed income: Bloomberg U.S. Aggregate Bond Index. IG corporates: Bloomberg U.S. Corporate Bond Index, High yield: Bloomberg U.S. Corporate High Yield Bond Index, Asset-backed securities: Bloomberg U.S. Asset Backed Securities Index, Mortgage-backed securities: Bloomberg U.S. Mortgage Backed Securities Index, Municipals: Bloomberg Municipal Index. Yields represent past performance and fluctuate with market conditions. Current yields may be higher or lower than those quoted above. An index is unmanaged and not available for direct investment. Past performance is no guarantee of future results. See “Index Definitions and Asset Class Risk Disclosures” link above for index definitions. 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. High-yield fixed-income securities are considered speculative, involve greater risk of default, and tend to be more volatile than investment-grade fixed-income securities. 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. In addition to the risks associated with investment in debt securities, a fund’s investments in mortgage-backed and asset-backed securities will be subject to prepayment, extension and call risks. Municipal bonds are subject to credit risk and potentially the Alternative Minimum Tax (AMT). Quality varies widely depending on the specific issuer. Municipal bonds offer interest payments exempt from federal taxes, and potentially state and local income taxes. 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
- Many fixed-income asset classes, along with cash, are yielding more than our longer-term inflation expectation of 2.5%.
- Diversifying income streams can potentially dampen portfolio volatility and reduce the probability of wide swings in income levels.
- It is important for investors to evaluate the potential upside and downside return of their bond holdings if interest rates move higher or lower from current levels.