Global Fixed Income Strategy Quarterly Guidance

GLOBAL INVESTMENT STRATEGY Global Fixed Income Strategy Quarterly Guidance

July 19, 2021

Brian Rehling, CFA Quarterly guidance on global fixed income Head of Global Fixed Income • Short-term yields have been anchored by the Federal Reserve. Strategy Intermediate and long-term yields are expected to rise further on better growth prospects.

Peter Wilson • Our duration guidance is neutral. (Duration is a bond’s price Global Fixed Income Strategist sensitivity to interest rate changes.) Given the low-yield environment, we do not believe that the risk/reward profile merits positioning duration below or above benchmark levels. Luis Alvarado • We continue to favor broad diversification by fixed-income Investment Strategy Analyst asset class and sector, along with selectivity.

Quarterly fixed-income guidance: Third quarter 2021 In this report, we share our current tactical guidance (6 to 18 months) for fixed-income asset classes and sectors. Our current guidance levels are reflected below (and on the following pages).

Asset classes and sectors Guidance YTD 1 year Asset classes and sectors Guidance YTD 1 year

U.S. Taxable Investment Unfavorable -1.6% -0.3% Government Securities Unfavorable -2.5% -3.1% Grade Fixed Income U.S. Short Term Taxable Most Treasury Securities Unfavorable -2.6% -3.2% 0.0% 0.4% Fixed Income unfavorable Agencies Neutral -0.8% -0.4% U.S. Intermediate Term Neutral -1.8% -0.5% Inflation-Linked Fixed Taxable Fixed Income Neutral 1.7% 6.5% U.S. Long Term Taxable Income Unfavorable -4.6% -1.9% Fixed Income Investment-Grade Credit Neutral -1.3% 3.0% High Yield Taxable Fixed Neutral 3.6% 15.4% Investment-Grade Income Neutral -1.3% 3.3% Developed Market Ex-U.S. Corporate Neutral -6.0% 2.6% Fixed Income (Unhedged)* Preferred Stock Favorable 5.4% 20.7% Emerging Market Fixed Neutral -1.0% 6.8% Securitized Favorable -0.8% -0.4% Income (U.S. Dollar) Residential Mortgage- Municipal Favorable 1.1% 4.2% Favorable -0.8% -0.4% Backed Securities Commercial Mortgage- High Yield Municipal Neutral 6.1% 14.3% Neutral -0.5% 2.3% Backed Securities Asset-Backed Securities Neutral 0.2% 1.3%

Sources: Wells Fargo Investment Institute (WFII) and Bloomberg, June 30, 2021. WFII guidance is as of July 19, 2021. YTD = year to date. An index is unmanaged and not available for direct investment. Past performance is no guarantee of future results. See end of report for important risk information, index definitions, and Wells Fargo Investment Institute guidance definitions. Inflation-Linked Fixed Income equates to Treasury Inflation-Protected Securities. *We no longer recommend strategic allocations to Developed Market Ex-U.S. Fixed Income. We also do not favor holding tactical positions in Developed Market Ex-U.S. Fixed Income at this time. In the table above, a neutral rating on Developed Market Ex-U.S. Fixed Income means that we do not favor tactically allocating to this fixed-income asset class at this time.

Investment and Insurance Products: NOT FDIC Insured  NO Bank Guarantee  MAY Lose Value © 2021 Wells Fargo Investment Institute. All rights reserved. Page 1 of 13 Global Investment Strategy —|—Quarterly Fixed Income Guidance —| —Third Quarter 2021 Tactical guidance U.S. Taxable Investment Grade Fixed Income vs. a four-asset-group portfolio | Unfavorable We expect the economy to improve and U.S. Treasury yields to rise further in the second half of 2021. Yet, our belief is that interest rates will remain relatively low compared with history for the next few years. Therefore, we currently favor reallocating toward more risk-oriented asset groups over U.S. Taxable Investment Grade (IG) Fixed Income and thus have an unfavorable view of this asset class. While we believe that investors’ taxable total-return expectations should be tempered, taxable investment-grade fixed-income holdings remain an important portfolio diversifier that can provide a portfolio shock absorber during times of market stress.

U.S. Short Term Taxable Fixed Income vs. a fixed-income portfolio | Most unfavorable Short-term interest rates (as measured by two-year Treasury yields) have stabilized in the 0.15% to 0.25% range. The Federal Reserve (Fed) has committed to using all of its tools to support U.S. economic, labor, and financial market conditions; it has essentially anchored yields on the very short end of the curve in a trading range with its actions and comments. Investing in short-term securities provides minimal income opportunities at current levels; currently, there is not material income pickup for extensions out to the two-year portion of the yield curve. As we believe that short-term interest rates are unlikely to increase significantly in the near term, we expect U.S. Short Term Fixed Income to underperform most other fixed-income asset classes.

U.S. Intermediate Term Taxable Fixed Income vs. a fixed-income portfolio | Neutral Modest growth and inflation expectations, along with a dovish Fed, suggest that a neutral view of U.S. Intermediate Term Taxable Fixed Income is appropriate. While we expect that future returns in the Intermediate Term Taxable Fixed Income asset class will remain positive over our tactical time frame, we expect that returns will be limited given the low-rate environment. Still, we prefer intermediate-maturity bonds over short-term or long-term fixed income, giving them the opportunity to take advantage of yield-curve steepness without taking on too much interest rate risk.

U.S. Long Term Taxable Fixed Income vs. a fixed-income portfolio | Unfavorable Although long-term, high-quality fixed income can be an important portfolio diversifier, we believe modestly higher interest rate expectations indicate that some reallocation to more risk-oriented asset classes is warranted as the expansion continues. Also, longer-term fixed-income securities display longer duration (a measure of interest rate sensitivity), which leaves them vulnerable to larger capital losses if the curve steepens further (as we expect).

Duration | Neutral Our duration guidance is neutral for both taxable and tax-exempt (municipal) bond sectors. U.S. interest rates increased at a fast pace in the first quarter but declined moderately in the second quarter. Hence, our view remains that a neutral duration stance leaves us best positioned should rate volatility increase, moving unexpectedly lower while leaving us the opportunity to lengthen beyond benchmark duration should rates move above the upper range of our year-end 10-year target of 2.00% to 2.50%. A modestly steeper curve may provide value to investors in intermediate fixed-income securities, which is why we believe investors should not decrease or increase duration relative to benchmark levels.

Structure We expect modest global inflation and an uncertain global growth outlook to keep interest rates relatively low in the coming years. We generally expect the Treasury yield curve to remain relatively flat — but positively sloped — in the short end but show signs of steepening in the long end as inflation expectations begin to increase and growth

expectations rise. We believe that investors should consider using multiple positions along the yield curve in the current environment.

Credit quality Not all fixed-income asset classes have recovered evenly, so we believe that investors should exercise care in security selection. We continue to favor an emphasis on diligent credit analysis for fixed-income portfolios. We do expect corporate taxable-security issuance to decline from last year’s record levels. This should provide support for investment-grade credit issuers and spreads. We recommend that investors consider holding a moderate level of government securities for diversification, liquidity, and situations in which investors seek to reduce risk in portfolios. Government securities may offer a hedge in the event of unexpected volatility, as they have generally been the beneficiary of risk-off market events.

Treasury Securities vs. Government Securities | Unfavorable We view holdings of Treasury securities as a high-credit-quality hedge during periods of market volatility, which we still expect in the upcoming quarters. We also expect heavy Treasury issuance to continue and do not anticipate that the Fed will increase Treasury market intervention over the medium term. Demand for Treasuries from foreign investors given the relative attractiveness of Treasury yields when compared with other available developed market sovereign issues could offset an eventual decline in purchases from the Fed.

Agencies vs. Government Securities | Neutral Agency spread levels have contracted and currently offer only a small yield pickup versus Treasury yields. Given ongoing government support, relatively short duration, and healthy liquidity, we believe that agency paper is fairly valued versus Treasury securities and these securities can provide enhanced sector diversification. The agency market has shrunk in size over the past decade and represents just 2% of the Bloomberg Barclays U.S. Aggregate Bond Index.

Inflation-Linked Fixed Income vs. Government Securities | Neutral Inflation expectations, as measured by the breakeven rate for 10-year Treasury Inflation-Protected Securities (TIPS), peaked in the second quarter after months of rising, supported by stronger economic growth. Still, TIPS can offer an attractive hedge against unexpected inflation over the medium to long term. However, TIPS are generally longer-duration securities and could see price declines if interest rates increase.

Investment-Grade Credit vs. U.S. IG Taxable Fixed Income | Neutral Quality credit holdings can allow fixed-income portfolios to generate excess yield through spread premium (also known as carry) that is meant to compensate investors for perceived issuer credit risk. Currently, we believe that corporate debt offers investors a reasonable level of carry and liquidity per unit of risk. We reiterate our bias toward appropriate credit research and selectivity when investing in this sector. Furthermore, investment-grade credit indexes tend to have longer durations than most benchmarks, which could hamper performance as rates continue to rise.

Investment-Grade Corporate vs. IG Credit | Neutral Although spreads have compressed and the attractiveness of investment-grade corporates has diminished somewhat, we still believe they can offer reasonable carry (yield) potential in a market segment that offers better liquidity than several other sectors. We believe that investors should emphasize sound credit analysis, with a strong focus on selectivity among issuers and sectors. Given the relative steepness of the investment-grade corporate yield curve relative to the Treasury yield curve today, we see incremental value in intermediate-term corporate bonds. © 2021 Wells Fargo Investment Institute. All rights reserved. Page 3 of 13 Global Investment Strategy —|—Quarterly Fixed Income Guidance —| —Third Quarter 2021

Preferred Stock vs. IG Credit | Favorable The preferred stock sector has rebounded off its pandemic lows given investors’ appetite for risk and is now fairly valued in our opinion. Still, yields in the preferred sector are higher than many other bond sectors, and for this reason we favor preferred securities for yield-seeking investors. The preferred sector is susceptible to price decline should markets turn risk-averse. Investors should purchase preferred securities for their income capabilities and not with the expectation of price return in the current environment.

High Yield Taxable Fixed Income vs. a fixed-income portfolio | Neutral Performance in the high-yield (HY) asset class has been strong year to date. Credit-spread tightening has driven most of this performance. High-yield credit spreads hit their most recent peak of 1,100 basis points (bps)1 on March 23, 2020, and have moved steadily lower ever since. In early July, spreads fell below 265 bps, a dramatic decline even lower than pre-pandemic levels. This significant spread compression decreases the yield cushion in the asset class and gives high yield a less attractive risk/return profile. High yield should remain among the better-performing fixed-income asset classes over the coming 12 to 18 months, but we expect muted future returns. Many of the factors that have powered strong high-yield performance — including an improving economic outlook and significant fiscal and monetary liquidity actions — remain in place. For these reasons, we do not anticipate a meaningful sell-off in the high-yield sector and maintain a neutral rating. We believe the best returns are in the rearview mirror and better opportunities for risk-oriented investors exist in equity markets. For any high-yield allocations, selectivity remains key, and we believe investors are best served using active management to help them navigate the credit landscape in high yield.

Bank Loans vs. HY Taxable Fixed Income | Neutral We currently have a neutral view of Bank Loans — also known as leveraged loans — given our expectation that interest rates will continue to move higher amid a strengthening economic backdrop. Also, the shorter duration profile of the leveraged-loan sector is attractive in the current rate environment. Currently, prices of leveraged loans are climbing as positive investor sentiment toward this asset class has attracted demand from both retail investors and from collateralized loan obligations (CLOs) with the increase in issuance. Default rates and distress ratios for leveraged loans continue to decline as corporate earnings improve. We believe that leveraged loans may be appropriate for those investors seeking additional sources of yield. We continue to advocate for selectivity and active management in this space — in line with our view on high-yield bonds.

Securitized vs. U.S. IG Taxable Fixed Income | Favorable Yield is an important component of an investor’s sector selection, and the securitized sector offers investors potential income opportunities that cannot be found in other highly rated fixed-income securities.2 This sector can provide diversification to a fixed-income portfolio and generally has lower correlation to other sectors.

Residential Mortgage-Backed Securities vs. Securitized | Favorable Residential mortgage-backed securities (RMBS) have historically offered strong liquidity and relatively low credit risk. In our view, current yields on RMBS are moderately attractive (even as the spread between corporate securities and RMBS has narrowed). Offsetting our favorable view are continued worries around prepayment levels,

1. 100 basis points equal 1.00%. 2. Fixed-income securities whose interest and principal payments are backed by cash flows from a pool (or portfolio) of other securities are securitized fixed-income assets. Examples include mortgage-backed securities and asset-backed securities. © 2021 Wells Fargo Investment Institute. All rights reserved. Page 4 of 13 Global Investment Strategy —|—Quarterly Fixed Income Guidance —| —Third Quarter 2021

reduced volatility levels, and expected Fed tapering. Investors should be aware that duration in the RMBS sector tends to increase as interest rates rise, and such was the case in the first half of the year. We currently favor a balanced view of coupon structure across the mortgage-backed securities (MBS) market.

Commercial Mortgage-Backed Securities vs. Securitized | Neutral We hold a neutral stance on commercial mortgage-backed securities (CMBS). Credit research is critical for investors purchasing CMBS, as concerns around sector fundamentals continue to weigh on this market. CMBS represent less than 2% of the Bloomberg Barclays U.S. Aggregate Bond Index. Investors should be aware that these investments can be somewhat illiquid. We believe that investors should weigh their benchmark allocation when considering purchases of these securities.

Asset-Backed Securities vs. Securitized | Neutral Similar to other non-Treasury securities, spreads widened dramatically on asset-backed securities (ABS) during the depths of the pandemic. Spreads now stand near pre-pandemic levels. We believe that both the auto and credit card subsectors of the ABS market represent fair value. While we believe that high-quality ABS can offer important sector diversification to portfolios, we caution investors to avoid lower-rated and subprime ABS issues, as they may be more susceptible to credit risks. 3

Municipal | Favorable We maintain a favorable view of municipal bonds and continue to believe that strong technicals remain, even as yields and their relative value versus taxable issues are not as compelling as in previous months. Municipal bonds are expected to continue to receive support from summer reinvestment demand and negative net supply due to coupon and principal redemptions. Investors are expected to receive nearly $95 billion available for reinvestment in the third quarter. We believe economic conditions will continue to improve in the second half, and we recognize this will likely be beneficial to revenues at the state and local levels. Additionally, several of the fiscal stimulus measures could also help alleviate budget burdens suffered by states and local governments. Furthermore, we believe that an eventual change in tax policy (once through the pandemic) may result in even stronger demand for municipal bonds as individuals and institutions assess the specific impacts of those potential tax changes. Taxable municipal bond issuance remains a large share of overall issuance. However, bipartisan efforts to reinstate tax-exempt advance refunding bonds could slow down this trend. Demand for municipal bonds continues to be strong with only one weekly outflow year to date, largely reflecting tax rate increase expectations. The markets have increasingly priced in an expected tax rate increase; however, should tax rates be lower than current expectations, there could be a mild pullback in demand. Still, the combination of low supply of traditional municipal bonds coupled with strong demand creates a favorable backdrop, in our view. From a valuation perspective, 10-year municipal bonds have historically offered about 85% of the yield of Treasuries (given they are tax-exempt). However, those municipal/Treasury yield ratios are now closer to 70%. This makes us more cautious around valuations. Low ratios combined with an uneven recovery leads us to believe that investors should undertake careful credit research or professional management in the current muni market environment, which has seen uneven impacts across the market and even within sectors.

Portfolio structure We believe that rates will remain low and range-bound for the medium term, and we anticipate that coupon income and yield will be a major factor in near-term municipal performance. We favor premium coupon structure, and we find value in the additional spread pickup offered in 3% to 4% coupons, although the spread pickup is decreasing. Bonds with a lower coupon structure will have longer duration, and the yield pickup is reflective of that.

3. Ratings noted throughout this report are based on S&P Global Ratings. © 2021 Wells Fargo Investment Institute. All rights reserved. Page 5 of 13 Global Investment Strategy —|—Quarterly Fixed Income Guidance —| —Third Quarter 2021

We expect the pace of rate increases to slow in the coming months, providing an opportunity for 3% to 4% coupons to outperform again.

Curve positioning The municipal yield curve flattened slightly in the second quarter as long-term yields declined. The short end of the yield curve steepened, mostly due to the effects of Fed actions on Treasuries. The steepest part of the municipal curve remains the three- to nine-year maturity area, where investors can pick up additional yield. Curve positioning must always take into account the duration targets of a portfolio as a whole.

Credit quality Credit spreads continued to tighten during the second quarter, and we feel that this trend will continue while investors continue to search for yield and as additional fiscal stimulus continues to roll out. However, we reiterate paying close attention to credit quality given the possibility that some municipal credits may still face challenges. While we believe we may see downgrade pressure on some parts of the municipal market, we do not fear widespread defaults, as the default percentage of the total market remains extremely low (under 0.50%) and is largely on nonrated credits. We prefer A-rated or higher essential-service revenue and general obligation bonds in the traditional tax-free sector due to these credits’ anticipated ability to meet debt service obligations and hold their value relative to nontraditional municipal project financing. However, for investors for whom it is appropriate, we currently recommend above-benchmark-level exposure to BBB-rated municipal credits. We believe that issues in the BBB credit rating can help raise yield potential and provide better returns given the strong demand for munis as the recovery continues to take hold. Yet, selectivity and careful credit research remain important in the municipal space. We believe that investors should emphasize the underlying credit and rely on professional management in this space today.

Duration | Neutral While overall market yields have risen, we believe that investors should maintain a neutral duration position relative to their benchmarks. We favor intermediate-maturity bonds, where much of the yield-curve steepness value can be captured.

Revenue (Essential Service) vs. Municipal | Favorable While we retain our slight preference for essential-service revenue bonds, recent developments in the revenue sector somewhat weaken its strength relative to the issuer’s credit, and market participants and rating agencies are placing revenue bonds closer to the associated general obligation issues in some cases. We believe that essential- service revenue bonds are generally better equipped than other types of municipal bonds to deal with extreme market events, including the current pandemic. Like general obligation bonds, some revenue sectors such as health care and education may have greater exposure to broad matters of political policy than traditional essential-service revenue bonds.

General Obligation (State and Local) vs. Municipal | Neutral We generally favor state (over local) general obligation issues but caution that there is wide credit discrepancy within these categories. State and local governments have benefited from federal stimulus over the past year. We believe this targeted aid should support many issuers through the fiscal year 2021, though political decisions on spending this aid and ensuring structural balance after it is depleted will significantly vary from issuer to issuer. The full credit impact of the pandemic will be delayed for local general obligations due to the timing lag of property valuations and tax receipt. Tax-policy changes carry potential impacts on state and local revenues and expenses. Federal treatment of state and local taxes, reduced federal support of programs and projects that are shared with states and localities, any changes in health care support, and other potential downstream effects all could impact various municipal issuers. © 2021 Wells Fargo Investment Institute. All rights reserved. Page 6 of 13 Global Investment Strategy —|—Quarterly Fixed Income Guidance —| —Third Quarter 2021 Taxable Municipal vs. Municipal | Favorable Taxable municipals have continued to be in high demand and issuance has remained elevated. Due to the elimination of tax-exempt advance refunding bonds, issuers have capitalized on low taxable yields to advance refund tax-exempt bonds. We expect the share of taxable issuance to remain elevated in the second half of 2021, with the majority of this issuance coming in the form of advance refunding. Additionally, the new issuance has the potential to translate into higher-quality and longer-maturity bonds. This development could be somewhat beneficial to traditional corporate buyers in the low-rate environment. However, they have been crowding out traditional municipal new issuance as mentioned above. Also, higher Treasury yields could begin to place some dents on demand. The possible issuance of Build America Bonds (BAB) to fund the recently proposed infrastructure bill combined with higher Treasury yields caused taxable municipal bonds to underperform in the first half of the year. For now, it remains to be seen if the bill will be passed in its current form and how it will be funded.

Pre-Refunded vs. Municipal | Unfavorable We remain unfavorable on pre-refunded municipal securities. Municipal/Treasury ratios declined during June. Ratios inside of two years remain attractive, at 171% of Treasuries at one year and 72% of Treasuries at two years. Yields on pre-refunded bonds are now slightly cheaper than the AAA scale but continue to be 1 to 2 basis points lower than those of AA-rated bonds. The overall supply of pre-refunded securities increased slightly during June. Much of the recent supply has been driven by the origination of new taxable refunding issuance, despite the decline in tax-exempt advance refundings. However, rising bond yields further out the curve could begin to slow any additional refunding activity. Also, we may see a reconsideration of tax-exempt refundings under the Biden administration.

High Yield Municipal vs. Municipal | Neutral The yield spread between investment-grade and high-yield municipal bonds has compressed rapidly over the past six months, removing some of the additional benefit that the higher yield was providing in exchange for the reduced credit quality. Additionally, we believe that high-yield municipal bonds are more susceptible to investor outflows once yield hikes for both taxable and tax-exempt issues resume. Still, we believe high-yield municipal bonds could offer additional income opportunities to those investors willing to bear the additional risk.

Crossover opportunities | Neutral (was unfavorable) The indicators that we use to monitor municipal-to-corporate crossover opportunities show tax-adjusted municipal yields are becoming lower than corporate yields for securities with similar credit ratings. We believe the shorter part of the municipal yield curve still remains attractive for high-tax-margin investors, but opportunities for crossover exist in the intermediate and longer-term part of the curve given the rapid increase in taxable yields. Because we expect taxable yields to continue to increase in the near term, crossover opportunities will remain a viable option for investors; hence, we recommend a move from unfavorable to neutral. However, we recommend investors remain aware of the differences in credit quality between municipal and corporate issues as they attempt to cross over. Also, in some cases, municipal bonds will continue to offer the additional benefit of being exempt from state and local taxes, which will favor the purchase of state-specific municipal bonds versus corporates, particularly in states with higher tax rates like California and New York.

© 2021 Wells Fargo Investment Institute. All rights reserved. Page 7 of 13 Global Investment Strategy —|—Quarterly Fixed Income Guidance —| —Third Quarter 2021 Developed Market Ex-U.S. Fixed Income vs. a fixed-income portfolio | Neutral We are neutral on Developed Market Ex-U.S. Fixed Income. We anticipate a steady-to-weaker dollar though year- end and into 2022, which should increase the (unhedged) foreign exchange component of the expected return on developed market bonds denominated in foreign currencies. Outside of foreign exchange appreciation, however, we cannot expect strong returns from government bond markets in the eurozone and Japan, which make up the bulk of developed market fixed income outside the U.S. Although yields are under upward pressure abroad as they are in the U.S., they are likely to rise only very gradually and should remain, in many cases, at negative or near-zero levels. Thus, we look for modest yield increases in these markets over the coming year and expect moderate capital losses from this asset class. (Note that although we are neutral on Developed Market Ex-U.S. Fixed Income, because we have a zero strategic allocation, we do not favor tactically allocating to this fixed-income asset class at this time.)

Regional Despite early 2021’s sharp rise in yields, we do not currently see any attractive yield opportunities among eurozone sovereigns. A powerful combination of monetary policy (the EUR 1.85 trillion [$2.20 trillion] Pandemic Emergency Purchase Program, or PEPP) and fiscal policy (the EUR 750 billion [$890 billion] Recovery and Resilience Facility, or RRF) narrowed Italian and other noncore eurozone spreads to their tightest levels in two years, and they have widened back only slightly (to late-2020 levels) as yields rose this year. Although 10-year BTP yields have backed off historical lows below 50 bps, risk premium remains insignificant. After the European Central Bank (ECB) extended its faster pace of PEPP bond purchases through the summer months, yields and spreads may stay contained for now. We may expect more volatility later in the year when the PEPP tapering debate resumes and ECB hawks and doves try to reach agreement on a post-COVID-19 monetary stance for 2022.

Developed Market Sovereigns The rise in developed market (ex-U.S.) index yields in early 2021 was relatively rapid, and yields revisited the top of the 0.17% to 0.64% trading range that has contained since mid-2019. June’s more dovish ECB meeting allowed index yields to fall back from this peak, and in any case they remain very low on an absolute basis, and far below those in the U.S. Although 10-year bund yields are now closer to zero than they were in 2020, at index level most of the largest sovereign markets within the benchmark index (in the eurozone and Japan) still have yields close to zero or negative across much of the yield curve. (Five-year Greek government bonds recently trading below zero illustrates just how little value exists within eurozone markets where the ECB continues to depress yields.) As of mid-June 2021, only Canadian, Australian, and New Zealand markets offered yields comparable with U.S. Treasury notes at 10-year maturities. Therefore, in our view, neither absolute nor relative value (versus corporate bonds) is attractive. Even when economies reopen and growth improves as we anticipate, we expect that subdued inflation will mean that yields will drift higher only gradually or will continue to range-trade at current low levels.

Developed Market Investment-Grade Corporates (euro-denominated) With underlying developed market government bond yields remaining at negative levels, even with the increases seen recently, aggregate investment-grade corporate bond index yields are still trading around 0.30%, near historical lows (as of mid-June 2021), and spreads are still grinding tighter. With eurozone growth expected to gather pace after a slow start to 2021 and with the ECB’s ongoing corporate bond buying, we do not anticipate that spreads will widen significantly in the near term; even so, given absolute low levels, attractive yield opportunities, even in investment-grade credit, will remain very limited.

© 2021 Wells Fargo Investment Institute. All rights reserved. Page 8 of 13 Global Investment Strategy —|—Quarterly Fixed Income Guidance —| —Third Quarter 2021 Emerging Market Fixed Income vs. a fixed-income portfolio | Neutral Yields on the emerging market (EM) sovereign debt index, the J.P. Morgan Emerging Markets Bond Index (EMBI Global, or EMBIG, in U.S. dollars) reached historical lows below 4.30% at the end of 2020, having been as high as 7.50% in March of that year. In early 2021, index yields were under pressure from the rise in U.S. Treasury yields and initially rose back above 5% — the EMBIG has a relatively long duration of around eight years, so it is more vulnerable than other USD credit markets to an increase in underlying Treasury yields. However, spreads have been very stable at levels of just over 300 bps, indicating that investor sentiment remains relatively robust for now despite short-term outflows in the first quarter. In the medium term, we expect EM sovereign debt in dollars to be well supported by investors’ search for return, with low-risk government bond yields still at relatively low levels despite the recent curve steepening. Moderate dollar weakness, which we expect to resume later in the year, should continue to ease sovereign default concerns in the context of a broadening global recovery. Preexisting EM headwinds, such as the contraction in world trade as well as uncertainties about the long-term impacts of the coronavirus on EM economies, are more negative for the sector. The international impact of a Biden presidency, as well as a vaccine-driven global recovery, should improve these fundamentals, but the positive impact on spreads may not be sufficient to fully offset upward pressure on underlying U.S. Treasury yields. These uncertainties and offsetting pressures, and the fact that index yields remain significantly below historical averages, keep us neutral for now.

Emerging Market U.S.-Dollar-Denominated Sovereigns Emerging market bonds have traditionally traded somewhat cheaply to equivalent-rating domestic high-yield corporates, but the coronavirus has made this relationship much more volatile. A return of investor flows as markets stabilized in 2020 tightened spreads and lowered EM yields, even given uncertainty over the impact of defaults on both weaker EM sovereigns and on the U.S. high-yield sector. EMBIG spreads narrowed from above 650 bps to a range just above 300 bps, where they have remained relatively stable so far in 2021. Spreads versus BB-rated U.S. corporates, more than 200 bps rich to the U.S. bonds at the bottom of the market, are now trading just under 100 bps wider than the equivalent-rating high-yield sector. The stability of EM spreads in the face of the U.S. Treasury curve steepening in the first quarter suggests that they remain well supported by investor demand. Although COVID-19 fiscal support and stimulus measures will see government borrowing increase massively worldwide, EM sovereigns will likely still have an aggregate government debt/gross domestic product (GDP) ratio around half that of developed markets. This growing fiscal burden may weigh on foreign exchange and local- currency-denominated debt. However, more importantly for USD-denominated sovereign borrowing, foreign- currency-denominated debt now makes up only a small portion of financing for most major EM sovereigns, substantially lowering the risk of an old-style EM sovereign debt crisis.

Emerging Market U.S.-Dollar-Denominated Corporates Over the medium term, we continue to prefer U.S.-dollar-denominated EM sovereigns over EM corporates. The WFII strategic index for EM debt is the EMBIG (sovereigns), and sovereigns likely have stronger longer-term fundamentals regarding access to dollar funding because governments usually have easier access to foreign currency and because USD borrowing is a smaller component of state financing than of corporate debt. Also, the large increase in corporate leverage over the past few years (especially in China) may put corporates more at risk of defaults than sovereigns if the global environment were to deteriorate and/or U.S. interest rates were to rise by more than we anticipate. However, given the prospects for a gradual further rise in U.S. yields, the shorter duration of the corporate index (under five years compared with eight years for sovereigns) may make a corporate allocation a useful portfolio stabilizer in the current environment despite being an off-benchmark position.

Risk factors Forecasts are not guaranteed and based on certain assumptions and on views of market and economic conditions which are subject to change. Investments in fixed-income securities are subject to interest rate, credit, liquidity, prepayment, extension and other risks. Interest rates change over time due to market conditions and changes in government policies. Bonds with longer durations are generally more price sensitive and volatile than those with shorter durations. Because bond prices generally fall as interest rates rise, the current low interest rate environment can increase the bond’s interest rate risk. Credit risk is the risk that an issuer will default on payments of interest and principal. This risk is higher when investing in high yield bonds, also known as junk bonds, which have lower ratings and are subject to greater volatility than investment grade securities. Liquidity risk is the risk that an investor may have difficulty selling a particular bond and thereby be forced to sell at a significant discount to market value. This risk is greater for thinly traded securities. If sold prior to maturity, all fixed income securities are subject to market risk and may be worth less than their original cost. Bank loans are subject to interest rate and credit risk. They are generally below investment grade and are subject to defaults and downgrades. These loans have the potential to hedge exposure to interest rate risk but they also carry significant credit and call-risk. Call risk is the risk that the issuer will redeem the issue prior to maturity. This may result in reinvestment risk which means the proceeds will generally be reinvested in a less favorable environment. Bank loans are difficult to value, have long settlement times and are relatively illiquid. As a result, they could face liquidity challenges. In addition to the risks associated with investment in debt securities, CLOs are subject to other risks, including, among others, the risk that the CLOs may have a limited trading market; the possibility that distributions from collateral securities will not be adequate to make interest or other payments; the quality of the collateral may decline in value or default; and the possibility that the investments in CLOs are subordinate to other classes or tranches. U.S. government securities, including Treasury securities, are backed by the full faith and credit of the federal government as to payment of principal and interest. Unlike U.S. government securities, agency securities carry the implicit guarantee of the U.S. government but are not direct obligations. Payment of principal and interest is solely the obligation of the issuer. If sold prior to maturity, both types of debt securities are subject to market risk. Treasury Inflation-Protected Securities (TIPS) are subject to interest rate risk, especially when real interest rates rise. This may cause the underlying value of the bond to fluctuate more than other fixed income securities. TIPS have special tax consequences, generating phantom income on the “inflation compensation” component of the principal. A holder of TIPS may be required to report this income annually although no income related to “inflation compensation” is received until maturity. 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. Build America Bonds are taxable municipal bonds created under the American Recovery and Reinvestment Act of 2009 that provide federal subsidies to the issuer for a portion of the borrowing costs. These municipal bonds are backed by the issuing municipality and are not obligations of the U.S. government. BABs are subject to federal taxes but may be exempt from state and local taxes. As with all bonds, BABs are subject to interest rate, credit and market risks. The yield, average life and the expected maturity of mortgage-related, commercial mortgage-backed securities and asset-backed securities are based on prepayment assumptions that may or may not be met. Changes in prepayments may significantly affect yield, average life and expected maturity. There are special risks associated with investing in preferred securities. Preferred securities generally offer no voting rights with respect to the issuer. Preferred securities are generally subordinated to bonds or other debt instruments in an issuer’s capital structure, subjecting them to a greater risk of non-payment than more senior securities. In addition, the issue may be callable which may negatively impact the return of the security. Preferred dividends are not guaranteed and are subject to deferral or elimination. Investing in foreign securities presents certain risks not associated with domestic investments, such as currency fluctuation, political and economic instability, and different accounting standards. This may result in greater price volatility. These risks are heightened in emerging markets. In addition to the risks associated with investing in international and emerging markets, sovereign debt involves the risk that the issuing entity may not be able or willing to repay principal and/or interest when due in accordance with the terms of the debt agreement.

WFII guidance definitions Most favorable: WFII’s highest conviction guidance that indicates a strong desire to overweight an asset class (or sector) within a portfolio. It also communicates that, over a tactical time frame, WFII views the asset class (or sector) as offering investors a very attractive risk/reward opportunity.

Favorable: Guidance that indicates a desire to overweight an asset class within a portfolio. It also communicates that, over a tactical time frame, WFII views the asset class (or sector) as providing investors with an attractive risk/ reward opportunity.

Neutral: Guidance that indicates a desire to maintain an asset class near the long-term (strategic) allocation guidance within a portfolio. It also communicates that, over a tactical time frame, WFII views the asset class (or sector) as providing investors with an acceptable risk/reward opportunity.

Unfavorable: This WFII guidance level indicates a desire to underweight an asset class (or sector) within a portfolio. It also communicates that, over a tactical time frame, WFII does not view the asset class (or sector) as providing investors with an attractive risk/reward opportunity.

Most unfavorable: WFII’s highest conviction guidance indicating a strong belief in underweighting an asset class within a portfolio. This also communicates that, over a tactical time frame, WFII views the asset class (or sector) as offering investors a very unattractive risk/reward opportunity.

Rating definitions from S&P Global Ratings AAA/Aaa rating: The highest quality debt, with minimal credit risk. AA rating: High quality and subject to very low credit risk. A rating: Upper-medium grade and subject to low credit risk. BB rating: Judged to have speculative elements; subject to substantial credit risk. BBB rating: Obligations are subject to moderate credit risk; considered medium-grade, and as such may possess certain speculative characteristics.

Index definitions An index is unmanaged and not available for direct investment. The Consumer Price Index (CPI) produces monthly data on changes in the prices paid by urban consumers for a representative basket of goods and services. Agencies:

Bloomberg Barclays U.S. Agency Index measures the performance of the agency sector of the U.S. government bond market and is comprised of investment-grade, native-currency U.S- dollar-denominated debentures issued by government and government-related agencies, including FNMA. The index includes both callable and non-callable agency securities that are publicly issued by U.S. government agencies, quasi-federal corporations, and corporate and foreign debt guaranteed by the U.S. government. Developed-Market Ex-US Fixed Income (Unhedged):

JP Morgan GBI Global ex-U.S. Index (Unhedged) is an unmanaged market index that is representative of the total-return performance in U.S. dollars on an unhedged basis of major non-U.S. bond markets. Emerging-Market Fixed Income (U.S. Dollar):

JP Morgan Emerging Markets Bond Index (EMBI Global) currently covers more than 70 emerging market countries. Eligible for inclusion in the EMBI Global US dollar-denominated Brady bonds, Eurobonds and traded loans issued by sovereign and quasi-sovereign entities Government Securities:

Bloomberg Barclays U.S. Government Bond Index is comprised of the U.S. Treasury and U.S. Agency Indices. The index includes U.S. dollar-denominated, fixed-rate, nominal U.S. Treasury securities and U.S. agency debentures (securities issued by U.S.-government-owned or government-sponsored entities, and debt explicitly guaranteed by the U.S. government). The U.S. Government Index is a component of the U.S. Government/Credit and U.S. Aggregate Indices. High Yield Taxable Fixed Income:

Bloomberg Barclays U.S. Corporate High-Yield Index covers the universe of fixed rate, non-investment-grade debt. Intermediate Term Taxable Fixed Income:

Bloomberg Barclays U.S. Aggregate 5-7 Year Bond Index is unmanaged and is composed of the Bloomberg Barclays U.S. Government/Credit Index and the Bloomberg Barclays 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. Investment-Grade Corporate Bonds:

Bloomberg Barclays U.S. Corporate Index includes publicly-issued U.S. corporate and Yankee debentures and secured notes that meet specified maturity, liquidity, and quality requirements. Investment Grade Credit:

Bloomberg Barclays U.S. Credit Index measures the investment grade, U.S.-dollar-denominated, fixed-rate, taxable corporate and government-related bond markets. It is comprised of the U.S. Corporate Index and a non-corporate component that includes foreign agencies, sovereigns, supra-nationals and local authorities.

Long Term Taxable Fixed Income:

Bloomberg Barclays U.S. Aggregate 10+ Year Bond Index is unmanaged and is composed of the Bloomberg Barclays U.S. Government/Credit Index and the Bloomberg Barclays 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. Mortgage-Backed Securities:

Bloomberg Barclays U.S. Mortgage Backed Securities (MBS) Index includes mortgage-backed pass-through securities of Ginnie Mae (GNMA), Fannie Mae (FNMA), and Freddie Mac (FHLMC). The MBS Index is formed by grouping the universe of more than 600,000 individual fixed rate MBS pools into approximately 3,500 generic aggregates. Municipal Bonds:

Bloomberg Barclays U.S. Municipal Bond Index represents municipal bonds with a minimum credit rating of at least Baa, an outstanding par value of at least $3 million and a remaining maturity of at least one year. The index excludes taxable municipal bonds, bonds with floating rates, derivatives and certificates of participation. Preferred Stock: S&P U.S. Preferred Stock Index is an unmanaged index consisting of U.S.-listed preferred stocks. Securitized:

Bloomberg Barclays U.S. Mortgage-Backed Securities (MBS) Index tracks agency mortgage backed pass-through securities (both fixed-rate and hybrid ARM) guaranteed by Ginnie Mae (GNMA), Fannie Mae (FNMA), and Freddie Mac (FHLMC). The index is constructed by grouping individual TBA-deliverable MBS pools into aggregates or generics based on program, coupon and vintage. Short Term Taxable Fixed Income:

Bloomberg Barclays U.S. Aggregate 1-3 Year Bond Index is unmanaged and is composed of the Bloomberg Barclays U.S. Government/Credit Index and the Bloomberg Barclays 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. Treasury Inflation-Protected Securities (TIPS):

Bloomberg Barclays U.S. TIPS Index consists of Inflation-Protection securities issued by the U.S. Treasury. Treasury Securities:

Bloomberg Barclays U.S. Treasury Index includes public obligations of the U.S. Treasury with a remaining maturity of one year or more. U.S. Taxable Investment Grade Fixed Income:

Bloomberg Barclays U.S. Aggregate Bond Index is an index composed of the Government Bond Index, the Asset-Backed Securities Index and the Mortgage-Backed Securities Index and includes U.S. Treasury issues, agency issues, corporate bond issues and mortgage-backed issues. High Yield Tax-Exempt Fixed Income:

Bloomberg Barclays U.S. Municipal Bond High Yield Index measures the non-investment grade and non-rated U.S. dollar-denominated, fixed-rate, tax-exempt bond market within the 50 United States and four other qualifying regions (Washington DC, Puerto Rico, Guam and the Virgin Islands).

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.

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. CAR-0721-01363