All types of bond funds are subject to interest-rate risk, but you can moderate it to some degree by choosing a bond fund with a shorter duration or average maturity. Generally, the longer a fund's duration or average maturity, the higher its interest-rate risk, or the more sensitive its share price will be to changes in interest rates. Fidelity's bond fund investment team employs a duration-neutral strategy so that each bond fund's duration is close to the fund's benchmark. Credit risk Bonds carry the risk of default, meaning that the issuer is unable to make further payments on it. Bond funds offer professional management and a range of quality ratings to help lower this risk.
Credit risk is a greater concern if the fund invests in lower-quality bonds.
Fidelity offers taxable and municipal bond funds which invest exclusively in high-quality bonds that are rated investment grade by outside rating agencies, further reducing their exposure to credit risk. A bond issuer may decide to pay off the principal of an existing bond before it matures. This risk is a particular concern with mortgage-backed bonds such as Ginnie Maes. This is because the fund must reinvest its assets at the prevailing rate, which is generally lower during times when widespread prepayments are occurring. This potential risk is what allows Ginnie Maes to provide higher yields than U.S. Treasuries.