Fixed income investments are a cornerstone of a well-diversified portfolio for many US investors, offering stability, predictable income, and a hedge against market volatility.

In 2025, with the Federal Reserve holding interest rates steady in the 4.25% to 4.5% range and a "wait-and-see" approach to future cuts, the fixed income landscape presents both opportunities and considerations for those seeking to balance risk and return.

Simply put, fixed income investments are essentially loans you make to a government, corporation, or other entity. In return for lending your money, the issuer agrees to pay you regular interest payments (the "coupon") over a specified period, and then return your original principal (the "face value") at a predetermined future date (the "maturity date"). Because the interest payments are usually fixed, they provide a predictable stream of income, hence the name "fixed income."

 

 

 

Why Consider Fixed Income in Your US Portfolio?

For US investors, fixed income plays several vital roles:

• Stability and Capital Preservation: Generally less volatile than stocks, fixed income can act as a "ballast" in a portfolio, providing stability and helping to preserve capital, especially during stock market downturns.

   

  
  


• Predictable Income Stream: Bonds pay regular interest, which can be a crucial source of income for retirees or those seeking consistent cash flow.
  

   

  
  


• Diversification: Fixed income investments often behave differently than stocks, offering diversification benefits that can help reduce overall portfolio risk.
  

   

  
  


• Lower Risk Profile: While not risk-free, high-quality fixed income (like US Treasury bonds) is considered relatively low-risk, especially when held to maturity.
  

   

  
  


• Specific Financial Goals: CDs and bonds with specific maturity dates can be ideal for saving for defined future expenses, like a down payment on a home or a child's college education.

Popular Fixed Income Options for US Investors

The US market offers a variety of fixed income instruments, each with its own characteristics:

 

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   Bonds:

   
   
   • U.S. Treasury Securities (Treasuries): Issued by the U.S. government, these are considered virtually risk-free because they are backed by the full faith and credit of the U.S. government. They include:

      

     
     
     • Treasury Bills (T-Bills): Short-term (up to 1 year).
     
     
     • Treasury Notes (T-Notes): Mid-term (2-10 years).
       

        

       
       
     
     
     • Treasury Bonds (T-Bonds): Long-term (20-30 years).
       

        

       
       
     
     
     • Treasury Inflation-Protected Securities (TIPS): Principal value adjusts with inflation, protecting purchasing power.
       

        

       
       
     
     
     
     
   
   
   • Corporate Bonds: Issued by companies to raise capital. Their risk depends on the company's creditworthiness.
     

      

      

     
     
     • Investment-Grade Bonds: Issued by financially strong companies, rated BBB- (S&P/Fitch) or Baa3 (Moody's) and above. Lower risk, lower yield.

        

       
       
     
     
     • High-Yield Bonds (Junk Bonds): Issued by companies with lower credit ratings, offering higher yields to compensate for higher risk.
       

        

       
       
     
     
     
     
   
   
   • Municipal Bonds (Munis): Issued by state, local, or municipal governments to fund public projects. A key attraction for US investors is that their interest income is often exempt from federal income tax, and sometimes from state and local taxes if you reside in the issuing state.
     

      

      

     
     
   
   
   
   


2. 
   

   Certificates of Deposit (CDs):

   
   
   • Federally insured savings accounts offered by banks and credit unions. You deposit money for a fixed period (e.g., 6 months, 1 year, 5 years) at a fixed interest rate. With current rates being relatively high, CDs are attractive for locking in returns. Early withdrawal penalties typically apply.
     

      

     
     
   
   
   
   


3. 
   

   Money Market Accounts/Funds:

   
   
   • Money Market Accounts: Interest-bearing savings accounts offered by banks. They offer higher interest rates than traditional savings accounts, with limited check-writing privileges. FDIC-insured.

      

     
     
   
   
   • Money Market Funds: Mutual funds that invest in highly liquid, short-term debt instruments. While not FDIC-insured, they are generally considered very low risk due to the quality of their underlying holdings.
     

      

     
     
   
   
   
   


4. 
   

   Preferred Stocks:

   
   
   • A hybrid security with characteristics of both stocks and bonds. They pay a fixed dividend, similar to bond interest, but represent equity ownership. They typically have no maturity date and rank higher than common stock in dividend payments and asset claims upon liquidation.
   
   
   
   

Key Factors to Weigh BeforeInvesting

Before diving into fixed income, consider these crucial factors:

• Interest Rates: Bond prices and interest rates have an inverse relationship. When interest rates rise, the value of existing bonds with lower fixed rates typically falls, and vice versa. As of May 2025, the Fed has held rates steady, but future rate cuts are still anticipated later in the year, which could impact bond prices.

   

   

   

  
  


• Yield vs. Price: The "yield" is your return on investment. If you buy a bond below its face value (at a discount), your yield will be higher than its coupon rate. If you buy above face value (at a premium), your yield will be lower.
  

   

   

  
  


• Maturity Date: The longer the maturity, the more sensitive the bond's price is to interest rate changes (higher interest rate risk).
  

   

  
  


• Credit Risk (Default Risk): The risk that the issuer won't be able to pay back interest or principal. Evaluated by credit rating agencies like Moody's, S&P, and Fitch. U.S. Treasuries have virtually no credit risk, while high-yield corporate bonds have significant credit risk.
  

   

  
  


• Inflation Risk: The risk that inflation will erode the purchasing power of your fixed interest payments and principal. TIPS are designed to mitigate this.
  

   

  
  


• Liquidity Risk: The risk that you may not be able to sell your bond quickly at a fair price before maturity. Individual bonds can sometimes be less liquid than bond funds.
  

   

   

  
  


• Call Risk: Some bonds are "callable," meaning the issuer can repay the bond early, typically if interest rates fall, forcing you to reinvest at a lower rate.
  

   

  
  


• Tax Implications (US Specific):
  
  
  
  • Interest from corporate bonds is generally taxable at the federal, state, and local levels.
    

     

    
    
  
  
  • Interest from U.S. Treasuries is taxable at the federal level but exempt from state and local income taxes.
    

     

    
    
  
  
  • Interest from municipal bonds is often exempt from federal income tax, and sometimes from state and local taxes if you live in the issuing state.
    

     

    
    
  
  
  
  

How US Investors Can Access Fixed Income

You don't need to buy individual bonds directly to invest in fixed income. Common ways for US investors to get exposure include:

 

• Brokerage Accounts: Most online and full-service brokers allow you to buy individual bonds, CDs, and money market funds.

   

  
  


• TreasuryDirect.gov: You can buy U.S. Treasury securities directly from the government without a broker.
  

   

  
  


• Bond Mutual Funds: Professionally managed portfolios of various bonds. They offer diversification and liquidity but don't have a fixed maturity date or predictable value at maturity.
  

   

  
  


• Bond Exchange-Traded Funds (ETFs): Similar to mutual funds, but they trade like stocks on an exchange throughout the day. They offer diversification and liquidity.

The Current Fixed Income Landscape (Mid-2025)

As of May 2025, the Federal Reserve has maintained its benchmark interest rate at 4.25% to 4.5%. This policy remains restrictive, meaning bond yields are still at attractive levels compared to recent years. Investors are anticipating potential rate cuts later in 2025, which could cause bond prices to rise (as yields fall).

 

 

Experts are suggesting a "selective and flexible" approach, looking for opportunities in sectors like corporate credit (including high-yield for those with higher risk tolerance), securitized credit (like mortgage-backed securities), and emerging-market debt for diversification. High-quality issuers with strong balance sheets are favored amidst trade policy uncertainties.

 

 

Conclusion: A Foundation for Financial Health

Fixed income investments remain a vital component of a well-rounded financial strategy for US investors. They offer predictable income, capital preservation, and crucial diversification that can help navigate market fluctuations. By understanding the different types of fixed income, their associated risks, and how to access them, you can thoughtfully integrate them into your portfolio to align with your personal financial goals and risk tolerance. Always consult with a qualified financial advisor to tailor an investment strategy that's right for you.