Investment Strategy

The fixed-income consensus view

In many of our recent interactions, we have witnessed investors’ warm embrace of “the fixed-income consensus view.” Investors appear slightly bullish on bonds, supported by the much-anticipated interest-rate cutting cycle from the Federal Reserve (Fed); after all, as interest rates fall, bond prices increase.

It also seems that the consensus view includes a near-term slowdown in economic growth, but a recovery afterwards in 2026. We believe this could end up being beneficial generally for bonds as well, given that investors usually seek the general stability of fixed income during times of uncertainty. In this cover story, we address three fixed-income topics that are in investors’ minds and discuss our view on the potential near-term implications for investors.

1. The Fed resumes its interest-rate cutting cycle.

At his speech at the Jackson Hole Meeting, August 22, 2025, Fed Chair Jerome Powell stated, “labor markets are showing signs of softening, raising downside risks to employment.” The Fed has hinted it is ready to restart its interest-rate cutting cycle, and consensus appears almost certain that it will begin at the Fed’s next meeting on September 17. Details regarding the size of the cut and the pace of further cuts at upcoming meetings remain largely dependent on incoming economic data, the evolving outlook, and the balance of risks.

In our view, the Fed is not committed to a single course of action. We believe it will continue to calibrate between its dual mandate of price stability and a strong labor market.

On the other hand, it seems that financial markets remain ahead of the Fed, as the market is pricing the federal funds rate in the range of 2.75% – 3.00% by the end of 2026. In our view, this represents perhaps a bit too many rate cuts priced in given that the consensus on the macroeconomic landscape assumes that the U.S. only goes through a soft patch. We also believe that the Fed’s main aim is to continue its journey toward a more neutral policy rate, one that supports labor markets but also considers the threats of rising inflation from tariffs.

2. The U.S. Treasury yield has continued to steepen.

Historically, U.S. recessions have appeared once the yield curve re-steepens following periods of inversion. This has occurred mostly as a function of the Fed raising rates too aggressively during the tightening cycle and then rapidly attempting to correct course by cutting rates — but unable to avoid a recession.

This time, we expect the outcome will be different. The economy was able to accomplish a “soft landing” after the initial Fed rate cuts of 2024. Short-term yields have moved lower in anticipation of additional Fed rate cuts while long-term yields are expected to remain volatile. Long-term yields have declined while the economy has slowed; however, we anticipate inflation bouts in the near-term and economic growth momentum into 2026 have the potential to raise long-term yields effectively causing the yield curve to steepen.

Still, we view the consensus expectation as something like this: bond prices will likely rally as interest rates decline across the curve. In the near term, the short end of the curve will likely outperform, as Fed rate cuts cause short-term interest rates to decline at a faster pace, but intermediate- and long-term bonds will also likely rally as the longer end of the curve declines and the economy gradually slows.

However, we believe a relative potential advantage of short-term fixed income will be short lived because once those short-term bonds mature, they will need to be reinvested at a lower rate (reinvestment risk). Investors should keep in mind that non-recessionary easing cycles could also be bearish for long-term bonds because there is no regular pattern of interest-rate moves in the long end following Fed rate cuts. This is similar to what occurred during last year’s Fed rate cuts when long-term bonds underperformed.

As a result, we currently prefer the intermediate portion of the curve, which we think may still provide attractive returns (yield from income plus price appreciation if interest rates fall) while seeking to minimize the risks that come with extending duration if the economy avoids a recession and resumes its upward economic-growth trajectory.

3. The great rotation — Funds from money markets are redeployed farther out the yield curve.

Continuing with the idea of reinvestment risk mentioned above, we have been asking investors to prepare a plan for how to deploy their excess cash allocations into asset classes with higher expected returns once the Fed resumes the rate-cutting cycle. For now, the data show (see chart below) that investors in aggregate are not in a hurry to rotate out of ultra-short-term investments like Treasury bills or cash alternatives. On the contrary, inflows to cash alternatives have continued even with Fed rate cuts on the horizon.

Money market fund assets have continued to grow, topping all-time highsSources: Investment Company Institute (ICI) and Wells Fargo Investment Institute. Data as of September 3, 2025. Weekly data from January 1, 2007, to September 3, 2025. Data represented is ICI All Money Market Funds Total Net Assets.

We agree that money market rates declining from 4.25%-3.00%² over the next six months, is not tragic. In our view, the risk of staying overly concentrated in cash or cash-alternative investments relative to holding other fixed-income investments across the curve is that if the economy deteriorates more than expected, cash alternatives may not outperform bonds.

Bottom line, we believe that investors should consider diversifying into the intermediate portion of the yield curve.

² Source: Wells Fargo Investment Institute, September 12, 2025.

Markets have demonstrated better breadth

One of the major concerns that we often hear about from market participants is about the high level of concentration in markets, sometimes also referred to as weak breadth. Specifically, equity gains have mainly been led by a narrow group of technology and artificial intelligence (AI) related names that are benefitting from the massive amounts of spending on the required semiconductors and infrastructure. While we agree that narrow participation was problematic in the early innings of the market rebound, our favorite breadth indicator — the Bloomberg Cumulative Advance-Decline Line for New York Stock Exchange Stocks (the A-D line) — broke out to new a new high and returned to an uptrend on July 2, 2025. We believe this confirms that recent gains have been driven by a larger group of stocks.

The broadening out is probably due to a variety of factors, such as the delayed implementation of and lower rates on tariffs than initially thought, the prospect of rate cuts by the Fed, and continued strength in both the economy and corporate earnings. We believe all of these factors should be supportive of further gains over the coming year. This backdrop makes us more confident that any setbacks markets face, during the seasonally weak months of September and October, would be short-lived and are opportunities for intermediate- to long-term investors to put cash to work in equity markets.

As a reminder, we continue to favor higher quality areas such U.S. large- and mid-cap equities, along with the Financials, Information Technology, and Utilities sectors.

Market breadth is breaking outSources: Bloomberg and Wells Fargo Investment Institute (WFII). Daily data from September 8, 2022, through September 8, 2025. TRADNYC = Bloomberg Cumulative Advance-Decline Line for New York Stock Exchange Stocks. SMAVG (50) = 50-day simple moving average. SMAVG (200) = 200-day simple moving average. RSI = relative strength index. Past performance is no guarantee of future results.

Oil: OPEC+ supply to weigh on prices

The Organization of the Petroleum Exporting Countries and their allies (OPEC+), which has been upping its production quota since June, recently agreed to yet another oil production hike to occur in October. After years of withholding supply to support prices, the group has shifted strategy to recapture market share. So, what does this mean for oil markets?

This means that in the near term, prices will likely struggle to move meaningfully higher especially considering our outlook for an economic soft patch to dampen demand growth. This loose supply and demand balance is the primary rationale for our recent Energy commodity sector downgrade.

Our price outlook improves during the second half of next year, driven by a modest economic rebound that boosts oil demand. Meanwhile, having front-loaded production increases, future OPEC+ spare capacity will be significantly reduced (see chart). In other words, we expect the ability of the group to increase production to match this increased demand or cover unforeseen supply disruptions will be limited and in turn should tighten oil markets, improve sentiment, and allow prices to grind modestly higher by year-end 2026.

Although OPEC+ seems to be intent on aggressively returning supply, we still expect that OPEC+ —and domestic producers — would be responsive to material price weakness. Meaning, price rallies will likely be limited, but we also see little risk of sustained and significant price declines. If overweight in the Energy commodity sector, we would suggest trimming to a neutral weight and reallocating to where we see potential for more attractive opportunities within commodities, namely Industrial Metals and Precious Metals which enjoy attractive demand backdrops not hampered by such strong supply headwinds.

OPEC+ spare capacity headwind to lessenSources: International Energy Agency and Wells Fargo Investment Institute. Monthly data is from August 2022 to July 2025. October spare capacity is estimated by reducing spare capacity by planned OPEC+ supply growth estimate from July 2025 through October 2025. Future spare capacity is calculated using the same methodology of reducing October's spare capacity by the agreed supply growth estimates from OPEC+. These estimates assume no changes to production capacity.

Infrastructure capital needs outweigh public funding

We believe U.S. infrastructure systems will require significant investments from both public and private sources to bridge the funding required to improve the overall quality and capacity of the assets. According to the American Society of Civil Engineering’s (ASCE) 2025 report card, there remains significant funding gaps to improve infrastructure systems across a wide range of industries (see chart). While legislation, including the 2021 Infrastructure Investment and Jobs Act (IIJA) and the 2022 Inflation Reduction Act (IRA), has provided significant capital investment to fund many projects, the anticipated need far outweighs current commitments. Moreover, growing government budget deficits and increasingly constrained public finances likely necessitate that private capital will play a greater role in rebuilding and modernizing the country’s aging infrastructure.

Anticipated 10-year funding gaps to improve infrastructure assetsSources: ASCE 2025 report card. Data as of March 25, 2025. Assumes continued investment support from appropriation amounts set by the 2021 IIJA, 2022 IRA, and other legislation.

In addition to the current funding gaps that suggest capital supply and demand imbalances will persist for many years; several major trends may function as a tailwind for private-infrastructure funds in the coming decade and beyond. The transition to sustainable energy technologies and the rapid expansion of AI are driving major capital needs—particularly in data center infrastructure and energy capacity—creating long-term investment opportunities. Moreover, in looking outside the U.S., the burgeoning middle class in emerging market countries such as China and India may also lead to demand growth across most major infrastructure assets.

We believe an allocation to Private Infrastructure may offer potential benefits to a diversified portfolio of traditional stocks and bonds including resilient cash flows, the ability to protect against inflation, and attractive risk-return characteristics.

Alternative investments, such as hedge funds, private equity, private debt and private real estate funds are not appropriate for all investors and are only open to “accredited” or “qualified” investors within the meaning of U.S. securities laws.

Cash Alternatives and Fixed Income

Equities

Real Assets

Alternative Investments**

Source: Wells Fargo Investment Institute, September 15, 2025.

*Tactical horizon is 6-18 months

**Alternative investments are not appropriate for all investors. They are speculative and involve a high degree of risk that is appropriate only for those investors who have the financial sophistication and expertise to evaluate the merits and risks of an investment in a fund and for which the fund does not represent a complete investment program. Please see end of report for important definitions and disclosures.

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. Stock markets, especially foreign markets, are volatile. Stock values may fluctuate in response to general economic and market conditions, the prospects of individual companies, and industry sectors. Foreign investing has additional risks including those associated with currency fluctuation, political and economic instability, and different accounting standards. These risks are heightened in emerging markets. Small- and mid-cap stocks are generally more volatile, subject to greater risks and are less liquid than large company stocks. 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 (junk) bonds have lower credit ratings and are subject to greater risk of default and greater principal 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. The commodities markets are considered speculative, carry substantial risks, and have experienced periods of extreme volatility. Investing in a volatile and uncertain commodities market may cause a portfolio to rapidly increase or decrease in value which may result in greater share price volatility. Real estate has special risks including the possible illiquidity of underlying properties, credit risk, interest rate fluctuations and the impact of varied economic conditions.

Sector investing can be more volatile than investments that are broadly diversified over numerous sectors of the economy and will increase a portfolio’s vulnerability to any single economic, political, or regulatory development affecting the sector. Investing in the Financial services companies will subject an investment to adverse economic or regulatory occurrences affecting the sector. Risks associated with the Technology sector include increased competition from domestic and international companies, unexpected changes in demand, regulatory actions, technical problems with key products, and the departure of key members of management. Technology and Internet-related stocks, especially smaller, less-seasoned companies, tend to be more volatile than the overall market. Utilities are sensitive to changes in interest rates, and the securities within the sector can be volatile and may underperform in a slow economy.

Cash alternatives typically offer lower rates of return than longer-term equity or fixed-income securities and provide a level of liquidity and price stability generally not available to these investments. Some examples of cash alternatives include: Bank certificates of deposit; bank money market accounts; bankers’ acceptances, federal agency short-term securities, money market mutual funds, Treasury bills, ultra-short bond mutual funds or exchange-traded funds and variable rate demand notes. Each type of cash alternatives has advantages and disadvantages which should be discussed with your financial advisor before investing.

Investing in gold, silver or other precious metals involves special risk considerations such as severe price fluctuations and adverse economic and regulatory developments affecting the sector or industry.

Investing in specialty metals involves special risk considerations such as severe price fluctuations and adverse economic and regulatory developments affecting the sector or industry.

Alternative investments, such as hedge funds, private equity/private debt and private real estate funds, are speculative and involve a high degree of risk that is appropriate only for those investors who have the financial sophistication and expertise to evaluate the merits and risks of an investment in a fund and for which the fund does not represent a complete investment program. They entail significant risks that can include losses due to leveraging or other speculative investment practices, lack of liquidity, volatility of returns, restrictions on transferring interests in a fund, potential lack of diversification, absence and/or delay of information regarding valuations and pricing, complex tax structures and delays in tax reporting, less regulation and higher fees than mutual funds. Hedge fund, private equity, private debt and private real estate fund investing involves other material risks including capital loss and the loss of the entire amount invested. A fund's offering documents should be carefully reviewed prior to investing.

Hedge fund strategies, such as Equity Hedge, Event Driven, Macro and Relative Value, may expose investors to the risks associated with the use of short selling, leverage, derivatives and arbitrage methodologies. Short sales involve leverage and theoretically unlimited loss potential since the market price of securities sold short may continuously increase. The use of leverage in a portfolio varies by strategy. Leverage can significantly increase return potential but create greater risk of loss. Derivatives generally have implied leverage which can magnify volatility and may entail other risks such as market, interest rate, credit, counterparty and management risks. Arbitrage strategies expose a fund to the risk that the anticipated arbitrage opportunities will not develop as anticipated, resulting in potentially reduced returns or losses to the fund.

An index is unmanaged and not available for direct investment.

The Bloomberg Cumulative Advance-Decline Line measures market breadth by tracking the cumulative sum of daily net advances (advancing stocks minus declining stocks) over time, providing insight into overall market health and trend strength.

Relative Strength Index (RSI) is a momentum indicator that measures the magnitude of recent price changes to analyze overbought or oversold conditions.

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.

Wells Fargo Advisors is registered with the U.S. Securities and Exchange Commission and the Financial Industry Regulatory Authority, but is not licensed or registered with any financial services regulatory authority outside of the U.S. Non-U.S. residents who maintain U.S.-based financial services account(s) with Wells Fargo Advisors may not be afforded certain protections conferred by legislation and regulations in their country of residence in respect of any investments, investment transactions or communications made with Wells Fargo Advisors.

Wells Fargo Advisors is a trade name used by Wells Fargo Clearing Services, LLC and Wells Fargo Advisors Financial Network, LLC, Members SIPC, separate registered broker-dealers and non-bank affiliates of Wells Fargo & Company.