The views expressed are as ofthe dateindicatedand may change based on market or other conditions. Unless otherwise noted, the opinions provided are those of the speaker or author, as applicable, and not necessarily those of Fidelity Investments. The third-party contributors are not employed by Fidelity but are compensated for their services.
This information is intended to be educational and is not tailored to the investment needs of any specific investor.
As with all your investments through Fidelity, you must make your own determination whether an investment in any particular security or securities is consistent with your investment objectives, risk tolerance, financial situation, and evaluation of the security. Fidelity is not recommending or endorsing this investment by makingit available to its customers.
Past performance is no guarantee of future results.
Diversification and asset allocation do not ensure a profit or guarantee against loss.
In general, the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk, liquidity risk, call risk, and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so holding them until maturity to avoid losses caused by price volatility is not possible. Any fixed income security sold or redeemed prior to maturity may be subject to loss.
High-yield/non-investment-grade bonds involve greater price volatility and risk of default than investment-grade bonds.
While it may seem appealing to look at bonds that offer higher yields, investors should consider those higher yields to be a sign of potentially greater risk. Below are some of the potential risks involved with high yield investing.
Default risk - The risk of default on principal, interest, or both, is greater for high yield bonds than for investment grade bonds.
Credit risk -High yield bonds are subject to credit risk, which increases as the creditworthiness of the issuer falls. It’s important to pay attention to changes in credit quality, as less creditworthy bonds are more likely to default on interest payments or principal repayment.
Business cycle risk - High yield issuers typically have riskier business strategies and more leveraged balance sheets, exposing them to greater risk of default at times of a downturn in business conditions.
Call risk - High yield bonds are more likely to have call provisions, which means they can be redeemed or paid off at the issuer’s discretion prior to maturity. Typically an issuer will call a bond when interest rates fall, potentially leaving investors with capital losses or losses in income and less favorable reinvestment options. Prior to purchasing a corporate bond, determine whether call provisions exist.
Make-whole calls - Some bonds give the issuer the right to call a bond but stipulate that redemption occurs at par plus a premium. This feature is referred to as a make-whole call. The amount of the premium is determined by the yield of a comparable maturity Treasury security, plus additional basis points. Because the cost to the issuer can often be significant, make-whole calls are rarely invoked.
Event risk - A bond’s payments are dependent on the issuer’s ability to generate cash flow. Unforeseen events could impact their ability to meet those commitments.
Concentration risk - Excessive exposure to a specific market sector within any asset class could put investors at greater risk. It’s important to seek diversification across a wide range of issues and industries in order to reduce the negative impact of a default.
Equity correlation risk - The perception that high yield issuers may have trouble generating sufficient cash flow to make interest payments could make them behave like equities. In some cases, high yield bonds may fall along with equities during an economic or stock market downturn. This is a concern for investors using fixed income as a hedge against equity volatility.
Liquidity risk - High yield bonds that may have been easy to buy or sell when market conditions were calm can suddenly become very difficult to sell when volatility increases. Typically, the market for high yield bonds is less liquid than the market for investment grade or government bonds.
Interest rate risk - Although high yield bonds have relatively low levels of interest rate risk for a given duration or maturity compared to other bond types, this risk can nevertheless be a factor. As with all bonds, a rise in interest rates causes prices of bonds and bond funds to decline. Because credit and default risk are the dominant drivers of valuations of high yield bonds, changes in market interest rates are relatively less important. At the same time, a tightening in monetary conditions that usually accompanies a rise in the general level of interest rates may cause a lagging reaction by weaker credits because of their inability to find sufficient funding, which in turn weakens the balance sheet of the high yield entity.
Higher transaction costs - Due to a typically large spread between bid and offer prices, and higher transaction costs associated with less liquid securities, trading high yield bonds can be costly.
Research and monitoring demands - Current and accurate information can be more difficult to obtain for high yield bonds. Investors should conduct due diligence as they consider investment strategies and closely monitor the changing financial condition of the issuing company.
Foreign risk - In addition to the risks mentioned above, there are additional considerations for bonds issued by foreign governments and corporations. These bonds can experience greater volatility due to increased political, regulatory, market, or economic risks. These risks are usually more pronounced in emerging markets, which may be subject to greater social, economic, regulatory and political uncertainties.
You could lose money by investing in a money market fund. Although the fund seeks to preserve the value of your investment at $1.00 per share, it cannot guarantee it will do so. The Fund may impose a fee upon the sale of your shares. An investment in the fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The fund’s sponsor has no legal obligation to provide financial support to the fund and you should not expect that the sponsor will provide financial support to the fund at any time.
Stock markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments. Investing in stock involves risks, including the loss of principal.
Views expressed are as of the date indicated, based on the information available at that time, and may change based on market or other conditions. Unless otherwise noted, the opinions provided are those of the speaker or author and not necessarily those of Fidelity Investments or its affiliates. Fidelity does not assume any duty to update any of the information.
Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917
I am an experienced financial professional with a deep understanding of investment strategies and financial markets. Over the years, I have actively engaged in analyzing market conditions, evaluating investment options, and providing informed guidance to investors. My expertise extends to various asset classes, including bonds, stocks, and money market funds.
Now, let's delve into the concepts mentioned in the provided article:
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Investment Objectives, Risks, Charges, and Expenses:
- Before making any investment, it is crucial to consider the investment objectives, risks, charges, and expenses associated with the funds. This information is typically outlined in a prospectus or summary prospectus provided by the investment firm.
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Market Conditions and Dynamic Views:
- The views expressed in the article emphasize that market conditions can influence investment perspectives. Views are time-sensitive and subject to change based on market dynamics.
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Third-Party Contributors and Compensation:
- The article mentions that third-party contributors are not employed by Fidelity but are compensated for their services. This underscores the importance of understanding potential conflicts of interest in financial advice.
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Educational Information:
- The information provided is intended to be educational and not tailored to the specific needs of individual investors. It highlights the importance of investors making their own determinations based on their financial situation, risk tolerance, and investment objectives.
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Past Performance and Future Results:
- Past performance is acknowledged as no guarantee of future results, emphasizing the need for investors to consider a broader set of factors when making investment decisions.
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Diversification and Asset Allocation:
- Diversification and asset allocation are mentioned as risk management strategies. However, it is clarified that they do not ensure a profit or guarantee against loss.
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Bond Market Volatility and Risks:
- The article provides a comprehensive overview of risks associated with bond investments, including interest rate risk, inflation risk, liquidity risk, call risk, credit risk, and default risks.
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High-Yield/Non-Investment Grade Bonds:
- High-yield bonds are highlighted as having greater price volatility and default risks compared to investment-grade bonds. Specific risks such as default risk, credit risk, business cycle risk, call risk, event risk, and concentration risk are discussed.
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Equity Correlation Risk:
- There is a mention of the perception that high-yield issuers may behave like equities during economic downturns, indicating a correlation risk between high-yield bonds and equities.
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Liquidity Risk:
- Liquidity risk is emphasized, stating that high-yield bonds can become difficult to sell when market volatility increases.
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Interest Rate Risk:
- Although high-yield bonds have relatively low interest rate risk compared to other bond types, the article acknowledges that changes in market interest rates can impact their valuations.
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Transaction Costs and Research Demands:
- Trading high-yield bonds can be costly due to large bid-offer spreads and higher transaction costs. Additionally, research and monitoring demands are highlighted as information for high-yield bonds may be more challenging to obtain.
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Foreign Risk:
- Bonds issued by foreign governments and corporations carry additional risks due to political, regulatory, market, or economic uncertainties, especially in emerging markets.
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Money Market Fund Risks:
- The article cautions that money market funds, while seeking to preserve the value at $1.00 per share, may impose fees and are not guaranteed or insured by government agencies. There is no legal obligation for the fund sponsor to provide financial support.
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Stock Market Volatility:
- The volatility of stock markets is acknowledged, and it is emphasized that investing in stocks involves risks, including the potential loss of principal.
In conclusion, this information provides a comprehensive overview of various investment-related concepts and risks, serving as a valuable resource for investors considering different asset classes and financial instruments.
