Fixed Income Asset Classes – Types of Fixed Income Investments

Fixed income asset classes cover investments designed to provide investors with contractual or structured income payments and, in many cases, repayment of principal at maturity. They form a major part of global capital markets and are used by institutional and private investors for income generation, capital preservation, diversification and liability management.

Fixed income encompasses considerably more than government bonds. The market includes sovereign debt, investment-grade corporate bonds, high-yield bonds, municipal debt, securitised credit, private credit and real estate debt, each with different risk, return, liquidity and maturity characteristics.

Through FraserBond.com, investors and borrowers can explore real estate debt, structured finance and capital solutions within the broader credit market.

What Is Fixed Income?

Fixed income generally refers to debt instruments under which an issuer or borrower raises capital and agrees to make specified payments to investors or lenders.

A conventional bond may involve:

Principal Investment → Periodic Interest Payments → Principal Repaid at Maturity

However, payment structures vary. Some securities have floating rather than fixed interest rates, some are issued at a discount without periodic coupons, and others have payments linked to inflation or another benchmark.

Main Fixed Income Asset Classes

The fixed income universe can broadly include:

• Government bonds
• Government-related and agency debt
• Investment-grade corporate bonds
• High-yield corporate bonds
• Emerging-market debt
• Municipal bonds
• Mortgage-backed securities
• Asset-backed securities
• Collateralised loan obligations
• Bank loans
• Private credit
• Real estate debt
• Infrastructure debt

These categories can behave differently as interest rates, credit conditions and economic expectations change.

Government Bonds

Government bonds are debt securities issued by national governments to finance expenditure and refinance existing obligations.

Examples include:

• UK Gilts
• US Treasury securities
• German Bunds
• Japanese Government Bonds

Risk depends partly on the issuing government, currency and maturity.

Highly rated sovereign bonds are commonly used within portfolios for liquidity, diversification and relatively defensive exposure, although their market prices can still fluctuate significantly as interest rates change.

Investment-Grade Corporate Bonds

Investment-grade corporate bonds are issued by companies assessed by relevant credit-rating agencies as having comparatively stronger credit quality.

Companies issue bonds to finance activities such as:

• Capital expenditure
• Acquisitions
• Refinancing
• General corporate purposes
• Balance-sheet management

Corporate bonds generally offer additional yield over comparable government securities to compensate investors for credit and liquidity risks.

High-Yield Bonds

High-yield bonds are corporate debt securities carrying ratings below investment grade.

Because investors assume greater credit and default risk, high-yield issuers generally need to offer higher potential yields than stronger investment-grade borrowers.

Returns can be influenced by:

• Issuer performance
• Default expectations
• Economic conditions
• Interest rates
• Credit spreads
• Market liquidity

High yield therefore sits toward the higher-risk end of traditional public fixed income.

Emerging-Market Debt

Emerging-market debt includes bonds issued by governments and companies in emerging economies.

Debt may be denominated in:

• Local currency
• US dollars
• Euros
• Other major currencies

Investors may face additional risks involving currencies, political conditions, economic volatility, liquidity and sovereign creditworthiness.

The risk profile can vary substantially between individual countries and issuers.

Municipal Bonds

Municipal bonds are issued by local governments and related public-sector entities, particularly within markets such as the United States.

They may finance infrastructure and public projects including:

• Transport
• Schools
• Hospitals
• Utilities
• Other public facilities

Tax treatment and credit structures vary by jurisdiction and security.

Mortgage-Backed Securities

Mortgage-backed securities (MBS) are created from pools of mortgage loans.

Rather than relying solely on the creditworthiness of one corporate issuer, investor payments are linked to cash flows generated by the underlying mortgage pool and the security's particular structure.

Important risks can include:

• Credit risk
• Interest-rate risk
• Prepayment risk
• Extension risk
• Structural complexity

Residential and commercial mortgage-backed securities can have materially different characteristics.

Asset-Backed Securities

Asset-backed securities (ABS) are supported by pools of financial assets other than conventional mortgage pools.

Underlying assets can include:

• Auto loans
• Credit-card receivables
• Consumer loans
• Equipment financing
• Other contractual receivables

The structure can divide the cash flows into different tranches with different priorities and risk profiles.

Collateralised Loan Obligations

A collateralised loan obligation (CLO) typically holds a diversified portfolio of leveraged corporate loans.

Cash flows are distributed across different tranches.

A simplified structure might be:

Senior Tranches → Mezzanine Tranches → Equity

Senior tranches receive payment priority and generally bear less credit risk than junior portions of the structure.

Floating-Rate Loans

Bank loans and other floating-rate debt generally pay interest based on a reference rate plus a contractual credit spread.

Unlike a conventional fixed-rate bond, the coupon can therefore reset as benchmark rates change.

This reduces some forms of interest-rate duration exposure, although investors remain exposed to borrower credit risk and other risks.

Private Credit

Private credit refers broadly to lending undertaken outside traditional publicly traded bond markets.

Strategies can include:

• Direct lending
• Senior secured lending
• Unitranche financing
• Mezzanine debt
• Special situations
• Asset-backed lending
• Real estate debt

Private credit can potentially provide higher yields and greater structural protections than some public-market instruments, but investors typically accept lower liquidity and greater complexity.

Real Estate Debt

Real estate debt provides financing secured by or otherwise connected with property assets and development projects.

Strategies can include:

• Senior property loans
• Development finance
• Bridge lending
• Mezzanine loans
• Whole loans
• Commercial mortgage lending

Real estate debt sits at the intersection of fixed income, private credit and property investing.

Through FraserBond.com, investors and borrowers can explore real estate debt and structured property-finance solutions.

Senior Real Estate Debt

Senior real estate debt generally occupies the highest-ranking secured debt position in a property's capital structure.

A simplified structure is:

Senior Debt
↓
Mezzanine Debt / Preferred Capital
↓
Common Equity

Senior lenders typically receive repayment priority ahead of junior capital providers.

This generally reduces relative risk, although the actual risk still depends on leverage, asset quality, borrower strength and the underlying business plan.

Mezzanine Debt

Mezzanine debt occupies a junior position to senior lending but ahead of ordinary equity in the economic capital structure.

Because mezzanine investors assume greater risk, they generally require higher potential returns than senior lenders.

Mezzanine lending can be used to increase the amount of capital available for a property transaction without requiring the sponsor to provide all remaining capital as common equity.

Through FraserBond.com, borrowers can explore mezzanine finance as part of a broader real estate capital structure.

Fixed Income Risk and Return

Fixed income should not be viewed as automatically low risk.

Different investments can expose investors to:

• Interest-rate risk
• Credit risk
• Default risk
• Inflation risk