For investors focused on income investing, fixed income investments can offer many potential benefits, including:

 Diversification from stocks, including stock dividends.

Fixed income generally carries lower risk than stocks. This is because fixed income assets over stocks are debt instruments and have priority in the capital stack . This makes them generally more stable than equities and less volatile in times of economic uncertainty. 

What’s more, many investors, saving for retirement, hold a significant amount of stock or related mutual funds in their 401Ks etc. But by earmarking some of the portfolio to fixed income investments, the investor can potentially help offset losses during periods of market volatility.

Capital preservation.

If the bonds are held to maturity, bondholders get back the entire principal,

“Capital preservation means protecting the absolute value of your investment via assets that have a stated objective of return of principal,” according to Black Rock. Investors who are closer to retirement may rely on their investments to provide income. Because fixed income typically carries less risk, these assets can  retain their value for investors who are retiring and may have less time to recoup losses from stock. 

Predictable income stream.

Fixed income investments can help you generate a steady source of income. Investors receive a fixed amount of income at regular intervals, typically twice a year in the form of coupon payments on their bond holdings. In the case of municipal bonds, the income is exempt from federal taxes and  state taxes for residents of the issuing state

High returns, in some cases.

The value of the bonds themselves could fluctuate in value.  In times of uncertainty, when investors seek safe assets, the increased demand of bonds  could  cause their price to increase reflecting a gain on the principal for investors.   A drop in interest rates could have a similar impact on existing bonds.

Caution one: Rising interest rates.

Rising interest rates will cause bond prices to drop as interest rates and bond prices are inversely correlated.That means any bonds held by the investor loses value. Interest rate movements are the major cause of price volatility in bond markets. Recently, the Federal Reserve has kept interest rates unusually low to allow the economy to heal. But that trend will not last indefinitely.

Investors need to remember that If sold before maturity, the bond may be worth more or less than the face value. Rising interest rates will make newly issued bonds more appealing to investors because the newer bonds will have a higher rate of interest than older ones. If you decide to sell an older bond with a lower interest rate, you might have to sell it at a discount.

 Caution two: The Threat of inflation

Bonds provide a fixed amount of income on a set schedule. What if inflation creeps upward after the investor has purchased bonds? If the rate of inflation rises above this fixed amount of income, the investor loses purchasing power. Thus, bond investments can lose value over time. Often the Federal Reserve will raise interest rates to combat inflation risk. Inflation tends to heat up when an economy rebounds from a recession and businesses rush to raise prices to take advantage of consumer demand.

Caution three: Credit risk.

Credit risk (also known as business risk or financial risk) is the possibility that the bond issuer could default on its debt obligation.  In other words, the issuer may fail to timely make interest or principal payments and thus default on its bonds. Bonds are assigned credit rating scores that reflect their financial strength. The more financially sound an issuer is, the more reliable the income and the more expensive the bond will be. It can happen to corporations, countries, even some municipalities. If this occurs, investors may not receive the full value of their principal investment.

Caution four: Liquidity risk. 

This is the risk that investors won’t find a market for the bond, potentially preventing them from buying or selling when they want.

In the final analysis, it is important for bond investors to keep up with economic developments, price, inflation and interest rate movements as well as the policy statements from the Federal Reserve Board.