Fixed Income

Fixed income is an investment approach focused on preservation of capital and income. It typically includes investments like government and corporate bonds, money market funds (i.e. cash and term deposits). Fixed income can offer a steady stream of income with less risk than stocks.

There are differences within bonds. These are defined in three key ways:

1. Duration: This measures the sensitivity of bond prices to changes in interest rates. The higher expected returns of longer duration bonds compared to shorter duration bonds is known as the term premium.

2. Credit: This is measure of the likelihood of the bond issuer defaulting. For this reason, a top−rated government bond will perform differently to a low−rated corporate bond. The higher expected return associated with a lower credit quality bond is called the credit premium.

3. Currency: Bonds are issued in different currencies. So, Japanese Yen bonds may behave differently to US Dollar or Australian Dollar bonds.

These variables will impact the expected return and volatility of fixed income investing.

The bond market is a global market and is about twice the size of the share market. The US has the biggest bond market, followed by Japan, Europe and the UK. Each country’s bonds perform differently depending on news and market expectations. The Australian bond market only makes up about 2% of the overall market.