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Preparing for a rise in interest rates

Please see Slides 18-21 for Important Information, Risk Factors and Disclaimers

Jason FuchsFinancial AdvisorWells Fargo Advisors, LLC1900 Duke Street Suite 100 Alexandria, VA 22314703-739-1428January, 2012

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Introduction Background on current environment Economic forces Duration Strategies and recommendations The importance of asset allocation Resources

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Background of current environment

Since the bear market of 2008, we’ve seen record flows into fixed-income investments Two likely reasons for the shift:

Portfolio diversification Search for yield

Current low interest rates driven by:

Recession Financial crisis Monetary policy

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Background of current environment

Question may not be “if” but “when” rates will rise

The Advisory Services Group (ASG) at Wells Fargo Advisors anticipates substantially higher yields in next two to five years

Although generally less volatile than equities, fixed-income investments can and do lose money – often as a result of rising interest rates

ASG believes that now is the time to begin preparing for a rise in interest rates

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Economic forces

Several forces can cause interest rates to change:

Supply and demand Economic growth Inflation outlook Monetary policy Fiscal policy

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Duration

Used to approximate the percentage change in a bond’s value that results from a 1% change in interest rates.

The longer the duration, the more the price will fluctuate to a change in interest rates.

Also possible to determine duration of other fixed-income instruments such as ETFs and bond funds.

Duration is a measure of a security’s or portfolio’s sensitivity to interest-rate changes.

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Duration

This information is hypothetical and is provided for informational purposes only. It is not intended to represent any specific return, yield, or investment, nor is it indicative of future results.One basis point is equivalent to 0.01% (1/100th of a percent)

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Three hypothetical examples of the potential impact of rising rates on bond prices:

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• If 30-Year interest rates rose 238 basis points over the same 388 days – like they did from 10/15/93 – 11/7/94 – today’s 30-year bond would lose about 32% in value.

Source: Bloomberg, Wells Fargo Advisors

Hypothetical examples are used for illustrative purposes only and do not reflect the rates for any investment available for purchase through Wells Fargo Advisors.

Treasury securities are guaranteed by the full faith and credit of the U.S. government for the timely payment of interest and principal if held to maturity.

Bond A Bond B

• This bond lost over 26% of principal value in just over one-year from 10/15/93 – 1/7/94.

• 30-year interest rates rose 238 bps over the time period represented.

Source: Bloomberg, Wells Fargo AdvisorsPast performance is not an indication of future results.

Source: Bloomberg, Wells Fargo AdvisorsPast performance is not an indication of future results.

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8/15/2040

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Longer-maturity securities should underperform if rates rise

Source: Wells Fargo Advisors*Yield to maturity†Market value after instantaneous increase in the yield curve; 100 basis points (bp) equals 1 percentHypothetical examples are used for illustrative purposes only and do not reflect the rates for any investment available for purchase through Wells Fargo Advisors.

Coupon Years to Maturity

Current Price

Current YTM*

4.00% 2 100 4.00%

4.00% 5 100 4.00%

4.00% 10 100 4.00%

4.00% 20 100 4.00%

4.00% 30 100 4.00%

+100bp YTM

New Price†

Percent Change

5.00% 98.12 -1.88%

5.00% 95.62 -4.38%

5.00% 92.21 -7.79%

5.00% 87.45 -12.55%

5.00% 84.55 -15.45%

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Discount bonds have higher durations

Source: Wells Fargo Advisors*Yield to maturityHypothetical examples are used for illustrative purposes only and do not reflect the rates for any investment available for purchase through Wells Fargo Advisors.

Coupon Maturity Price YTM* Duration

0.00% 10 Years 61.03 5.00% 10.00

3.00% 10 Years 84.41 5.00% 8.36

5.00% 10 Years 100.00 5.00% 7.79

7.00% 10 Years 115.59 5.00% 7.38

10.00% 10 Years 138.97 5.00% 6.93

Higher-coupon bonds

with the same

maturity have lower

durations.

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Rising-rate strategies for individual bond holders

Bond ladderso Shorten duration by redeploying incomeo Shorten duration by redeploying principal

Buy premium bonds and sell discount bonds

Purchase step-up bonds for portfolio diversification

Purchase adjustable-rate preferred stock

Diversify with Treasury Inflation-Protected Securities (TIPS)

Another consideration is to add to credit exposure when appropriate and in line with your investment objectives and risk tolerance.

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Rising rates strategies for bond funds, closed-end funds (CEFs) and exchange-traded funds (ETFs)

Swap into bond funds and ETFs with shorter durations

Consider laddering fixed-income ETFs with finite lives

Sell a portion of your bond fund/ETF and buy individual shorter-term bonds

Consider investing in a floating-rate fund or bank-loan fund

Swap into a CEF that does not employ leverage

Another consideration is to add to credit exposure when appropriate and in line with your investment objectives and risk tolerance.

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The corporate market has been resilient

Russia/LTCM

Tech Bust

9/11 & Enron

Worldcom

Subprime & Credit Crisis

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(January 1, 1997 – December 31, 2010)

Merrill Lynch U.S. Corporate Master Bond Index - Reflects investment-grade bonds with average maturities of at least one year.Merrill Lynch High Yield Corporate Master II Index - Tracks the performance of U.S. dollar denominated below investment-grade corporate debt publicly issued in the U.S. domestic market. Source: FactSet; OAS: option-adjusted spread; bps: basis points (note 100 bps equals 1%). Past performance is not an indication of future results. High-yield bonds, also known as junk bonds, are subject to greater risk of loss of principal and interest, including default risk, than higher-rated bonds. An index is not managed and is unavailable for direct investment.

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Perc

ent

Muni debt is attractive, in our opinion

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Past performance is not an indication of future results.*A = Upper-medium grade and subject to low credit risk.; AA = High quality and subject to very low credit risk.; AAA = The highest quality debt, with minimal credit risk.

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, and deflation risk, which may cause the principal to decline and the securities to underperform traditional treasury securities.

Income from Municipal securities is generally free from federal taxes and state taxes for residents of the issuing state. While the interest income is tax-free, capital gains, if any, will be subject to taxes. Income for some investors may be subject to federal Alternative Minimum Tax (AMT). Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline of the value of your investment.

Source: Haver Analytics Wells Fargo Advisors

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Sample fixed-income asset allocation recommendations

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Slight Slight RecentUnderweight Underweight Neutral Overweight Overweight Changes Date

Traditional Fixed Income:U.S. Treasuries X Increase 8/26/09Agency Securities X Decrease 7/14/09Mortgage- Backed Securities1 X Decrease 5/21/09Corporate Bonds X Increase 9/29/08

Alternative Income:High Yield Securities2 X Increase 6/15/10International Developed3 X Increase 1/3/11Emerging Markets X Increase 5/21/09

Other Sectors:Municipal Bonds4 X Decrease 11/16/10

Slightly SlightlyShort Short Neutral Long Long

Duration X Shorten 3/31/08

FIXED INCOME SECTOR WEIGHTINGS

DURATION RECOMMENDATION

1. The yield, average life and expected maturity of mortgage-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.2. High-yield bonds, commonly known as junk bonds, are subject to greater risk of loss of principal and interest, including default risk, than higher-rated bonds. The price of these bonds may be volatile, and they are generally only suitable for aggressive investors.3. Investing in foreign securities presents certain unique risks not associated with domestic investments, such as currency fluctuation and political and economic changes. This may result in greater price volatility.4. Income from municipal securities is generally free from federal taxes and state taxes for residents of the issuing state. While interest income is tax-free, capital gains, if any, will be subject to taxes. Income for some investors may be subject to the federal Alternative Minimum Tax (AMT). Sample recommendations are hypothetical and are for illustrative purposes only. Current recommendations are subject to change without notice and may be different from those shown.

8/267/145/219/29

6/151/35/21

11/16

3/31

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Diversification

Fixed-Income investments are an important part of most asset allocation strategies and the asset class should remain an important part of your allocation strategy even when interest rates are on the way up. Diversification and asset allocation do not guarantee a profit or protect against a loss.

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Summary

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Investment returns of mutual funds and exchange-traded funds may fluctuate and are subject to market volatility. An investor’s shares, when redeemed or sold may be worth more or less than their original cost.

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Important information, risk factors and disclaimers Asset allocation and diversification do not guarantee a profit or protect against loss. Closed-End Funds (CEFs) are actively managed and can employ a number of investment strategies in

pursuit of the fund’s objectives. Some strategies may increase the overall risk of the fund outlined in the prospectus under the heading “Risk Factors.” A CEF has both a market price and net asset value (NAV), and these two values and their respective performances may differ. Changes in investor demand for a particular fund may cause the fund to trade at a price that is greater (lower) than it’s NAV, creating a share price premium (discount) to its NAV.

Laddering is a strategy for managing fixed-income investments by which the investor divides their investment dollars evenly among bonds that mature at regular intervals such as every six months, once a year or every two years.

The term “finite lives” indicates the investment has a maturity date, versus operating as a going concern.

Investing in fixed income securities involves certain risks such as market risk if sold prior to maturity and credit risk, especially if investing in high yield bonds, which have lower ratings and are subject to greater volatility. All fixed income investments may be worth less than the original cost upon redemption or maturity. Bond prices fluctuate inversely to changes in interest-rates. Therefore, a general rise in interest rates can result in the decline of the value of your investment.

High yield bonds, commonly known as junk bonds, are subject to greater risks of loss of principal and interest, including default risk, than higher rated bonds. The price of these bonds may be volatile, and they are generally only suitable for aggressive investors.

Past performance is no guarantee of future results. Mutual funds and exchange-traded funds are subject to risks similar to those of stocks. Investment

returns may fluctuate and are subject to market volatility, so that an investor’s shares, when redeemed or sold, may be worth more or less than their original cost.

 

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Important information, risk factors and disclaimers Income from Municipal securities is generally free from federal taxes and state taxes for residents of

the issuing state. While the interest income is tax-free, capital gains, if any, will be subject to taxes. Income for some investors may be subject to federal Alternative Minimum Tax (AMT). Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline of the value of your investment.

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, and deflation risk, which may cause the principal to decline and the securities to underperform traditional treasury securities.

With Treasury Inflation Protected Securities (TIPS) investors must report and pay tax on “Phantom income” even though they will not receive any principal until 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 nonpayment 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.

Floating Rate loans carry credit risks of nonpayment of principal or interest and risks of bankruptcy, insolvency, illiquidity, and valuation. A significant percentage of the Fund’s assets may be below-investment-grade securities ("high-yield securities" or "junk bonds"), which are rated lower because there is a greater possibility that the issuer may be unable to make its interest and principal payments. The Fund is subject to credit risk (the risk that the issuing company may not be able to pay interest and principal when due), interest rate risk (the risk that your investment may go down in value when interest rates rise), and risk of loss (the risk that you could lose money on your investment).

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Credit rating guide

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Wrap-up

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