Fixed Income
A class of investments that pay a predetermined, regular stream of interest payments and return principal at maturity, including bonds and notes.
What is Fixed Income?
Fixed income refers to debt instruments that pay investors a set schedule of interest (coupon) payments and return the original principal at maturity. The 'fixed' label reflects the contractual, predictable nature of the income stream — contrasting with the variable returns of equities. Major fixed-income categories include U.S. Treasury securities, corporate bonds, municipal bonds, mortgage-backed securities, agency bonds, and money market instruments. Fixed-income securities are rated by agencies (Moody's, S&P, Fitch) based on credit risk, ranging from AAA investment-grade to below BB junk/high-yield. Key risks include interest rate risk (prices fall when rates rise), credit risk (issuer default), inflation risk (fixed payments lose purchasing power), and liquidity risk. Fixed income typically provides portfolio diversification and acts as a 'flight-to-safety' asset during equity market stress.
Example
A pension fund with $1 billion in assets allocates 40% ($400 million) to fixed income — primarily U.S. Treasury bonds (30%) and investment-grade corporate bonds (10%). When equities declined 20% in 2022, Treasuries provided partial but imperfect cushioning. The portfolio illustrates fixed income's role as both income generator and portfolio stabilizer, though 2022 highlighted that bond prices can also fall sharply when interest rates rise rapidly.