Volatility: The Risk of Fixed Income Securities

 The risk of volatility in fixed income securities is partly because short-term interest rates tend to move in cycles like a pendulum, and they tend to be higher when rates are falling than when they are rising.

The risk of volatility in fixed income securities is real. Volatility is the risk that prices will decline or increase. In fixed income securities, the fluctuations in the price of the security are directly related to the value of the underlying instrument. They are also related to changes in interest rates or expectations of changes in interest rates.

In the aftermath of the 2008 crisis, the risk of volatility in fixed income securities dominated financial markets with heightened volatility. The most obvious cause for this was the collapse of Lehman Brothers and the deep recession that followed. Another was the collapse of Bear Stearns in March 2008, which ushered in the global financial crisis. Yet another was the dramatic drop in the price of oil shortly after the crisis began which hurt the energy sector and pushed it into recession.

Fixed income securities can be volatile, and therefore not suitable for all investors.

Volatility is a risk that investors are concerned with. When volatility is high, equity prices tend to be lower and it is harder to find investment opportunities that are both in line with the long-term trend and increase the likelihood of a return. When volatility is low, prices tend to be higher, and more investment opportunities are available.