Fidelity Bond Funds for Low Risk Income

12/19/2017 5:00 am EST


John Bonnanzio

Editor, Fidelity Monitor & Insight

We are slightly reducing our portfolios' sensitivities to rising short-term interest rates. Indeed, the Fed is likely to raise rates this month, and three times next year, notes fund expert John Bonnanzio, editor of Fidelity Monitro & Insight.

But should the economy pick up steam and force inflation a bit higher, the risk of even more hikes become greater. As a consequence, we’ve buying Fidelity Conservative Income Bond (FCONX), which is essentially a money market fund on steroids.

Conservative Income is an ultra-short (duration of less than two months) bond fund that, in many respects, resembles the money market funds of old, before new government regulations forced certain money market funds o focus only on government debt.

Corporate debt is now up to nearly 90% of assets as the management team sees a strong economy with little default risk. Financials (around 65%), with an emphasis on banks, are the dominant area.

The fund’s yield advantage over money markets (1.17% vs. 0.77%), has decreased somewhat from a year ago (about 40 basis points down from 63), but it remains an attractive alternative.


With more rate hikes likely in 2018, shorter-duration bonds could suffer — especially those focused on government debt. But with a strong economy and an ultra-short duration, this fund’s credit risk is low.

Fidelity Strategic Income (FSICX) could be grouped among Asset Allocation, Specialty or even Taxable Bond funds. But we label it a High Income fund because its yield objective is satisfied by its neutral allocation (about 45%) to high-yield (junk) bonds, and 15% to emerging market debt.

And, in recent years, floating-rate debt (now about 6%) was added at the expense of lower-yielding, U.S. government bonds (now 25%, down from 30%). These allocations provide a yield of 2.77%, a percentage point or so lower than its average high-yield peer.

The fund’s yield is tempered by significant holdings in U.S. and foreign investment-grade government bonds. While U.S. dollar exposure is 84%, there are also 8% euro and 3% yen exposures. (Top holdings include the sovereign debt of France, Japan and Germany.)

This mix creates a “barbelled” approach to risk management with U.S. and foreign government bonds offsetting its more credit-risky holdings.

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