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Yahoo U: What is fixed-income investing?

 

Fixed-income investments could be a leading area of growth in the years ahead. But despite that, most Americans still have no idea what fixed income actually is, according to a BNY Mellon national research study. 

The study found that just over a third (36%) of millennials don’t know when to add fixed income to their portfolios compared to (45%) of Baby Boomers, who are much closer to retirement age.

“This research demonstrates that regardless of age there is persistent confusion around fixed income investing, as well as the important role it can play in long-term financial planning,” said Liz Young, director of market strategy at BNY Mellon Investment Management.

What is fixed-income investing?

There are several types of fixed income. Government bonds, which cover a short- and long-term government debt, like a T-bill or a 30-year bond, in addition to municipal bonds. Corporate bonds, which is a form of debt issued by companies. There are also mutual funds and ETFs, which can loop together things like government bonds and corporate debt. They all deliver the same payment amounts to investors over the period of time that investors hold the investment, which is why they are called fixed income. 

The largest share of U.S. fixed income outstanding is actually U.S. government debt, which makes up 36%. That represents about $15.9 trillion of what is a $43.7 trillion pie of outstanding U.S. fixed income. Mortgage-related instruments are 23% and corporate debt makes up 22% of the total.

Fixed income risks

There are risks that are associated with fixed-income investing. Higher interest rates actually tend to lower bond prices, and that can create some elevated sensitivity to what the Federal Reserve is doing relative to equities. There is also inflation risk. Bonds pay out at regular intervals, a $50 coupon payment today might not be worth the same as the same $50 payment that investors get from the same bond in, let's say, 2024. That’s because of inflation. There's also default. What if a company’s bond an investor bought goes under? What if the purchased government bond defaults? Well, in that case, the investor may never be repaid back the original par value. In this case, fixed income is actually a different game relative to equities.

Brian Cheung is a reporter at Yahoo Finance and Valentina Caval is a producer.

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