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Quarterly Report Q1 2014

Wells Fargo Advantage Intermediate Tax/AMT-Free Fund

Fixed-income market review

The municipal curve flattened as long-term yields fell the most

AAA-rated GO yields (%)

5 4 3 2 1 0

12-31-13

3-31-14

  • The difference between 30-year and 2-year municipal bond yields narrowed 57 basis points (bps; 100 bps equals 1.00%), ending the quarter with a spread of 318 bps.

  • In spite of this flattening, the municipal yield curve remained steep. Thirty-year bond yields ended the quarter at 3.66%, and short-term yields were pinned at low levels consistent with accommodative monetary policy.

  • The belly of the curve was steepest. In a stable-curve environment, investments in this area would be expected to benefit the most from roll, or a natural decline in yield (increase in price) as a bond’s maturity shortens.

1 yr.

3 yr.

5 yr.

10 yr.

15 yr.

20 yr.

25 yr.

30 yr.

Long-term municipal ratios appeared attractive

Municipal/Treasury yield ratio

1.2 1.0 0.8 0.6 0.4 0.2 0.0

12-31-13

3-31-14

  • Longer-term municipal yields were higher than comparable-maturity Treasury yields.

  • Crossover (or nontraditional) buyers found value in tax-exempt municipals during the quarter.

  • Municipal bonds continued to be one of the cheaper fixed-income asset classes; with taxable- equivalent yields above 5.0%, investment-grade municipal yields compared favorably with high- yield and emerging markets debt yields.

3 yr.

5 yr.

7 yr.

10 yr.

20 yr.

30 yr.

Barclays Muni Bond 1–15 Year

Blend Index total return, Q1 2014

1–15

year quality (%)

AAA

1.67

AA

2.06

A

2.70

BBB

3.75

1–15 year muni sector (%)

Muni bond (1–15)

2.26

GO bond

2.31

Insured bond

2.82

Prerefunded

0.61

Revenue bond

2.43

Muni maturities (%)

1 year 3 year 5 year 10 year 20 year

0.24 0.33 1.00 3.13 4.74

Long bond

5.83

  • The Barclays Municipal Bond 1–15 Year Blend Index returned 2.26% during the quarter.

  • Higher-quality bonds (AAA-rated and AA-rated) underperformed lower-rated bonds.

  • Long-term bond returns outpaced those of shorter-term bonds because longer-term rates declined

the most.

Sources: Bloomberg L.P. and Barclays Past performance is no guarantee of future results.

3

Wells Fargo Advantage Intermediate Tax/AMT-Free Fund

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