Fixed-income asset classes

Fixed-income assets are a common component of diversified investment portfolios, aiming to offer steady income through regular interest payments. These assets are generally seen as lower risk than other investments, such as equities.

Government bonds and gilts

Treasury bonds/gilts (T-bonds)
T-bonds (or gilts) are long-term securities issued by governments with maturities ranging from ten to 30 years. They offer periodic interest payments and are often seen as safer investments than some alternatives.

Treasury notes (T-notes)
These are medium-term securities with maturities of one to ten years, also offering periodic interest payments.

Treasury bills (T-bills)
T-bills are short-term government securities maturing in a year or less, usually sold at a discount but redeemed at face value.

Index-linked gilts/Treasury Inflation-Protected Securities (TIPS)
These bonds are linked to inflation, aiming to protect against the risk of a decline in purchasing power.

Corporate bonds

Investment-grade bonds
Corporate bonds with a medium or high credit rating that are considered to be at lower risk from default than those issued with lower credit ratings.

High-yield bonds (junk bonds)
Corporate bonds with a low credit rating that are considered to be at higher risk of default than better-quality securities but have the potential for higher rewards.

Municipal bonds (US)

General obligation bonds
Backed by the credit of the issuing municipality, general obligation bonds are not tied to specific project revenue.

Revenue bonds
Revenue bonds are secured by the revenue from specific projects such as highway tolls or utilities.

Supranational bonds
These bonds are issued by multinational organisations such as the European Investment Bank or World Bank, often to fund development projects.

Securitised bonds

Mortgage-backed securities (MBS)
A mortgage-backed security is a type of security which is secured by mortgages on a pool of properties. Residential MBSs are backed by residential mortgages, while commercial MBSs are secured using loans on commercial property.

Asset-backed securities (ABS)
Pools of loans packaged and sold as securities – a process known as ‘securitisation’. Typically, the assets backing these are home mortgages or credit card receivables.

Convertible bonds
A convertible bond is a fixed-income debt security that yields interest payments but can be converted into a predetermined number of equity shares. The conversion from the bond to stock can be done at certain times during the bond’s life and is usually at the discretion of the bondholder.

Preferred shares
Technically a type of equity, preferred shares behave similarly to fixed-income securities, paying dividends and having priority over common shares when company assets are distributed upon bankruptcy.

Common aims of fixed-income investments

Predictability
Fixed-income investments are typically seen as offering predictable returns, and so may be favoured by more conservative investors or those nearing retirement.

Risk management
Generally seen as less volatile than equities, fixed-income investments potentially offer a buffer against market fluctuations.

Income generation
Providing a steady income through regular interest or dividend payments is one of the most common goals for those that use fixed-income investment strategies.

Key considerations

Interest-rate risk
The value of fixed-income securities can be affected by interest rates. For instance, rising interest rates could cause bond prices to fall.

Credit risk
This is the risk that the issuer of an investment asset could default on their payments.

Liquidity risk
Some fixed-income investments, especially those with lower ratings or in smaller markets, may suffer from poor liquidity.