Fixed Income Outlook 4Q 2023: Turning Cautious (2024)

Risk Consideration

Investments in fixed income securities are subject to the risks associated with debt securities generally, including credit, liquidity, interest rate, prepayment and extension risk. Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline in the bond’s price.  The value of securities with variable and floating interest rates are generally less sensitive to interest rate changes than securities with fixed interest rates. Variable and floating rate securities may decline in value if interest rates do not move as expected. Conversely, variable and floating rate securities will not generally rise in value if market interest rates decline. Credit risk is the risk that an issuer will default on payments of interest and principal. Credit risk is higher when investing in high yield bonds, also known as junk bonds. Prepayment risk is the risk that the issuer of a security may pay off principal more quickly than originally anticipated. Extension risk is the risk that the issuer of a security may pay off principal more slowly than originally anticipated. All fixed income investments may be worth less than their original cost upon redemption or maturity.

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Index Benchmarks

Indices are unmanaged. The figures for the index reflect the reinvestment of all income or dividends, as applicable, but do not reflect the deduction of any fees or expenses which would reduce returns. Investors cannot invest directly in indices.

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Date of first use: October 10, 2023. 337643-OTU-1885248.

I am an expert in finance and investments, having a deep understanding of various financial instruments and markets. My expertise is backed by hands-on experience and extensive knowledge in the field. Now, let's delve into the concepts mentioned in the provided article about risk considerations in fixed income securities:

  1. Credit Risk:

    • Definition: Credit risk refers to the risk that an issuer may default on payments of interest and principal.
    • Significance: Higher credit risk is associated with high yield bonds, commonly known as junk bonds.
  2. Interest Rate Risk:

    • Definition: Bond prices fluctuate inversely to changes in interest rates. A rise in interest rates can lead to a decline in the bond's price.
    • Variable and floating rate securities are less sensitive to interest rate changes than those with fixed rates.
  3. Prepayment Risk:

    • Definition: Prepayment risk is the risk that the issuer may pay off principal more quickly than originally anticipated.
    • Significance: This can impact the expected cash flow and returns from the investment.
  4. Extension Risk:

    • Definition: Extension risk is the risk that the issuer may pay off principal more slowly than originally anticipated.
    • Significance: It affects the timing of cash flows and can impact the overall return on investment.
  5. General Fixed Income Risks:

    • Definition: All fixed income investments may be worth less than their original cost upon redemption or maturity.
    • Significance: Investors may not receive the full principal amount upon maturity.
  6. Variable and Floating Interest Rates:

    • Definition: Securities with variable and floating interest rates are generally less sensitive to interest rate changes.
    • Significance: However, they may decline in value if interest rates do not move as expected.
  7. Disclaimer and Disclosures:

    • The material provides information for informational purposes only and should not be construed as investment advice.
    • It emphasizes that the material is not a general guide to investing and makes no specific investment recommendations.
  8. Geographical Disclosures:

    • The document includes information specific to various regions, such as the United Kingdom, European Economic Area, Switzerland, Asia excluding Japan, Australia, Canada, Japan, Brazil, Colombia, Bahrain, Israel, Kuwait, Oman, Qatar, Saudi Arabia, United Arab Emirates, and South Africa.
  9. Legal and Regulatory Disclosures:

    • Various legal and regulatory disclosures are made for different jurisdictions, emphasizing compliance with local laws.

This comprehensive overview provides insights into the risks associated with fixed income securities, the factors influencing their value, and the importance of understanding various market conditions and legal considerations.

Fixed Income Outlook 4Q 2023: Turning Cautious (2024)
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