Introduction

Fixed‑income investments, like bonds, are often seen as the calm counterpart to equities. But “fixed” doesn’t mean risk‑free. Bonds can be affected by interest‑rate changes, issuer health, inflation, and other factors. Knowing these risks helps you build a more resilient portfolio and avoid unpleasant surprises.‍

1. Interest‑Rate Risk

When interest rates rise, the value of existing fixed‑income securities falls, and vice versa. That’s because new bonds get issued at higher rates, making older bonds with lower coupons less attractive. Long‑term bonds are particularly sensitive since their cash flows are locked in for longer periods.

How to manage it: Keep an eye on duration—the longer the duration, the more sensitive the bond is to rate changes. Laddering different maturities or holding shorter‑term bonds can help mitigate this risk.

2. Credit Risk

Credit risk is the possibility that a bond issuer will default on its payments. High‑yield or “junk” bonds carry more of this risk than investment‑grade or government bonds. A downgrade in a company’s credit rating can also cause its bond prices to fall.

How to manage it: Diversify across issuers and sectors, and consider sticking to higher‑quality bonds if you’re risk‑averse. For corporate bonds, research credit ratings and financial health.

3. Inflation Risk

Inflation erodes the purchasing power of your fixed interest payments over time. Even if the bond’s nominal yield stays the same, rising prices mean your real return could be lower than expected.

How to manage it: Include inflation‑protected securities, like Treasury Inflation‑Protected Securities (TIPS), or shorter‑duration bonds that can be reinvested at higher rates. Diversifying into assets that historically outpace inflation (like equities or real estate) can also help.

4. Liquidity Risk

Not all bonds are equally easy to buy or sell. Some fixed‑income securities trade less frequently, making it harder to exit your position without accepting a lower price.

How to manage it: Focus on bonds with larger issuance sizes or those traded on more active markets. Bond funds and ETFs can also offer better liquidity, though they come with their own market‑price risks.

Conclusion

Fixed‑income investing isn’t just about clipping coupons and forgetting about it; it involves understanding and managing multiple risks. By recognizing interest‑rate, credit, inflation, liquidity, call, and prepayment risks, you can build a bond portfolio that better matches your goals and risk tolerance. Diversification across issuers, maturities, and bond types—plus a healthy mix of other asset classes—can help cushion your portfolio when the unexpected happens.