Fixed Income & Bonds

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What Fixed Income & Bonds Actually Covers

Fixed income is the broadest asset class by outstanding value — the US bond market alone exceeds $50 trillion — yet it is often reduced to a single line item in a brokerage account. The category spans instruments that differ enormously in risk, taxation, liquidity, and yield potential, from a 4-week T-bill backed by the US government to a CCC-rated high-yield bond from a leveraged buyout. Understanding the distinctions between the five major bond categories below is the foundation of any serious fixed income allocation decision.

• US Treasuries: Debt issued directly by the US Department of the Treasury, backed by the full faith and credit of the federal government, making them the benchmark for risk-free rates. T-bills mature in 4 weeks to 1 year and trade at a discount to face value; T-notes (2–10 year maturities) are the most actively traded Treasury instruments; T-bonds (20–30 year maturities) carry the most duration risk. All Treasury interest income is exempt from state and local taxes, which improves the effective yield for investors in high-tax states like California and New York.
• Investment-Grade Corporate Bonds: Bonds issued by companies rated BBB-/Baa3 or higher by S&P/Moody's/Fitch, offering a yield spread of roughly 50–200 basis points above comparable Treasuries to compensate for credit risk. Major issuers include Apple, Microsoft, JPMorgan Chase, and Johnson & Johnson; the investment-grade corporate universe forms the core of broad bond funds like Vanguard BND and iShares AGG, where average credit quality sits around A-/A3.
• Municipal Bonds: Debt issued by state and local governments, most of which is exempt from federal income tax and often exempt from the issuer's state tax as well, making munis highly attractive for investors in the 32%+ federal tax bracket. The tax-equivalent yield formula — muni yield divided by (1 minus your tax rate) — lets you compare a 3.5% tax-exempt muni to a 5.1% taxable bond if you're in the 32% bracket; iShares MUB and Vanguard VTEB are the most widely held muni ETFs with over $10 billion AUM each.
• High-Yield Bonds: Bonds rated BB+/Ba1 or lower (commonly called junk bonds), issued by companies with higher leverage, earlier business stage, or weaker balance sheets, offering yield spreads of 300–700 basis points above Treasuries to compensate for elevated default risk. High-yield bonds historically experience default rates of 3–5% annually during normal conditions and spike to 10–14% during recessions; iShares HYG and SPDR JNK are the two most liquid high-yield ETFs, each trading hundreds of millions of dollars daily.
• TIPS and Inflation-Protected Securities: Treasury Inflation-Protected Securities adjust their principal value semi-annually with the Consumer Price Index (CPI), so the real yield is locked in at purchase while the nominal return floats with inflation. A TIPS bond with a real yield of 2% returns 2% above whatever inflation turns out to be, protecting purchasing power in a way nominal bonds cannot; iShares TIP provides diversified TIPS exposure, while TLT (iShares 20+ Year Treasury) tracks the long end of the nominal Treasury curve and is widely used as a direct interest rate duration trade.

How To Evaluate Fixed Income Investments

Evaluating a fixed income investment means going beyond the headline yield number — a bond offering 7% could be a below-investment-grade credit with significant default risk, while a 3.8% TIPS is offering a real inflation-adjusted return with no credit risk at all. The five dimensions below are the practitioner's framework for comparing bonds across categories, maturities, and brokerage platforms on an equal footing.

• Yield to Maturity: The total annualized return you earn if you hold the bond to maturity and reinvest coupons at the same rate, accounting for any discount or premium you paid at purchase. YTM is the apples-to-apples comparison metric: a 5% coupon bond purchased at $1,050 has a lower YTM than one purchased at $950, even though the stated coupon is identical. Always compare YTM — not coupon rate — when choosing between bonds of similar maturity and credit quality.
• Duration and Interest Rate Risk: Modified duration measures how many percent a bond's price falls for each 1 percentage point rise in interest rates — a bond with a duration of 8 loses approximately 8% in market value if rates rise 1%. The iShares TLT ETF (20+ year Treasuries) carries a duration near 17, meaning a 1% rate move causes roughly a 17% price swing; iShares AGG has a duration near 6, and a portfolio of 1-year T-bills has a duration near 1. Investors who need to sell before maturity bear full duration risk; investors who hold to maturity recover par value regardless.
• Credit Risk and Ratings: Moody's, S&P, and Fitch each publish credit ratings that summarize the probability of default — investment grade runs from AAA/Aaa down to BBB-/Baa3, with a historical 10-year cumulative default rate below 1%; high yield starts at BB+/Ba1 with 10-year default rates that range from 5% (BB) to over 30% (CCC). The yield spread between a BBB-rated corporate and a comparable Treasury represents the market's price for that credit risk — when spreads widen during economic stress, bond prices fall regardless of what happens to the underlying interest rate level.
• Tax Treatment: The type of bond issuer determines your effective after-tax yield — Treasury interest is subject to federal income tax but exempt from state and local tax; municipal bond interest is generally exempt from federal tax and potentially state tax if you own bonds from your home state; corporate bond interest is fully taxable at all levels. A 4.5% Treasury yield in a 37% federal bracket with 9.3% California state tax nets roughly 3.3% after all taxes; a 3.2% California muni yield is fully tax-exempt for California residents in the same bracket, making it the higher after-tax yield. Tax-exempt status makes munis most valuable in taxable accounts, not in tax-advantaged IRAs or 401(k)s where the tax benefit is irrelevant.
• Liquidity and Access: On-the-run US Treasury bonds and large investment-grade corporate issues with $1 billion+ face outstanding are highly liquid, trading with bid-ask spreads of 1–5 basis points for institutional-sized orders. Off-the-run Treasuries, smaller corporate issues (under $100 million outstanding), and most individual municipal bonds are far less liquid, with retail bid-ask spreads of 0.25%–1% or more on orders below $50,000. Bond ETFs like BND, AGG, and MUB solve the liquidity problem by providing intraday trading at tight spreads of 1–2 cents per share, at the cost of maturity control and the certainty of a defined principal repayment date.

What Spreads Really Tell You

When you buy a bond through a brokerage platform, you almost never trade at a transparent exchange price the way you would with a stock. Most individual bonds trade over-the-counter (OTC), meaning the broker sources the bond from its own inventory or from a dealer network and marks up the price before selling it to you. That markup — the difference between what the broker paid and what you pay — is the dealer spread, and it is the primary hidden cost of individual bond investing that commission comparisons entirely miss.

A 0.5% spread on a $10,000 Treasury purchase costs $50 immediately on execution; the same spread on a $10,000 corporate bond trade costs the same in dollar terms, but corporate bond spreads are routinely 3–5x wider than Treasury spreads for retail-sized orders. Fidelity and Schwab publish their markups on fixed income trades in trade confirmations — Fidelity's Fixed Income platform is widely cited for above-average transparency, showing the markup as a separate line item. Interactive Brokers routes to a network of competing bond dealers and typically offers tighter spreads on corporate bonds for active accounts, but the platform requires more manual price verification. E*TRADE's bond screener allows side-by-side comparison of dealer quotes on the same CUSIP, revealing spread variation across dealers before execution.

The type of bond you're buying determines the spread benchmark that matters. On-the-run Treasuries carry spreads of essentially zero to 2–3 basis points for retail buyers at auction, and 2–5 basis points in the secondary market. Investment-grade corporate bonds typically carry dealer spreads of 10–50 basis points depending on issue size and liquidity — a widely held Apple bond trades far tighter than a smaller industrial issuer. High-yield bonds and municipal bonds are where spread costs become most significant, often running 25–100 basis points on retail-sized trades below $50,000 face value.

• On Treasuries, compare your executed price to the TreasuryDirect auction price or to FINRA's TRACE data; dealer spreads above 5 basis points on standard on-the-run issues are worth questioning on any sizable order.
• For corporate bonds, request a pre-trade price quote from at least two platforms before executing; Fidelity and Interactive Brokers frequently show meaningfully different prices on the same CUSIP for the same settlement date.
• E*TRADE's fixed income screener aggregates dealer quotes and lets you sort by yield, which surfaces whether the offered yield is in line with comparable bonds at other dealers.
• Vanguard's bond desk often shows competitive pricing on investment-grade corporate inventory for clients with allocations above $100,000, and Vanguard bond ETFs (BND, VTEB) offer near-zero effective spread through the fund structure itself.
• High-yield bonds below $50,000 face value are notoriously wide; for these exposures, HYG (iShares) and JNK (SPDR) eliminate dealer spread entirely and trade intraday at 1–2 cent bid-ask spreads on the stock exchange.
• Always request a bond trade confirmation that shows the markup line explicitly — FINRA rules require disclosure, but the default interface on many platforms buries it in a secondary confirmation screen.

Broker Inventory And Availability

Not every broker has access to the same bond inventory, and the difference can be substantial. A broker with a deep fixed income desk — Fidelity, Schwab, and Interactive Brokers lead for retail investors — maintains relationships with dozens of primary dealers and bond market makers, and can source bonds across the credit spectrum at competitive prices. Equity-focused platforms that added bonds as a secondary feature often offer only a thin selection of on-the-run Treasuries and large investment-grade issues, with no meaningful access to municipal bonds, agency bonds, or high-yield corporates in the secondary market.

For Treasury purchases, the competitive landscape is relatively level: Fidelity, Schwab, E*TRADE, Vanguard, and Interactive Brokers all allow direct purchases at Treasury auction with no commission or markup through TreasuryDirect-linked programs. New-issue auction participation is the best way to buy Treasuries — you receive the official auction price with no dealer markup at all. The real differentiation comes in secondary market trading and in non-Treasury categories. Fidelity's Fixed Income Research Center provides access to over 100,000 bonds including corporate, municipal, and agency securities, with CUSIP-level credit analytics from Moody's and S&P integrated directly into the screener. Schwab's BondSource platform aggregates inventory from multiple dealers, giving clients visibility into available securities across rating tiers and maturities before placing an order.

Municipal bonds deserve special attention — with over one million outstanding CUSIPs and a fragmented dealer market, muni inventory quality varies dramatically between brokers. Retail municipal bond availability is often geographically concentrated; Fidelity's muni inventory is consistently one of the deepest in the retail channel, particularly for high-quality general obligation and revenue bonds. Interactive Brokers provides access to institutional-level muni inventory through their multi-dealer marketplace, which benefits investors placing larger orders above $100,000 where the spread savings are most meaningful.

• Fidelity allows no-commission purchases of new-issue Treasury bonds at auction; their secondary market bond desk covers over 100,000 fixed income securities searchable by rating, yield, maturity, and issuer type.
• Schwab's Bond Ladder Builder tool helps investors screen by maturity date and credit rating while visualizing the cash flow schedule across a laddered portfolio of individual bonds.
• Interactive Brokers provides a multi-dealer bond marketplace where competing bids and offers for the same CUSIP are visible before execution — particularly valuable for corporate bonds where dealer spreads vary meaningfully.
• E*TRADE offers brokered CDs alongside Treasury and corporate bonds in a single fixed income screener, making it a convenient one-stop platform for income-oriented portfolios that mix CDs with bonds.
• Vanguard's brokerage bond inventory is strongest for clients managing larger fixed income allocations; Vanguard's own bond ETFs (BND, VTEB, VGIT) are available commission-free and represent an alternative to individual bond selection for most account sizes.
• For high-yield bonds below $100,000 in retail account sizes, ETFs like HYG and JNK provide the most practical access — the individual high-yield secondary market offers poor liquidity and wide spreads for retail-sized orders at virtually every broker.

Settlement And Account Operations

Bond settlement mechanics differ meaningfully from equity settlement and create operational requirements that catch new bond investors by surprise. US Treasury bonds now settle T+1 (one business day after the trade date), while most corporate and municipal bonds settle T+2; some thinly traded over-the-counter issues may settle T+3. When you buy a bond between coupon payment dates — which is almost always — you also pay accrued interest, the portion of the next coupon that has already been earned by the seller since the last payment date. This accrued interest is added to the quoted flat price to produce the full price (also called dirty price) that actually clears from your account, and it is returned to you on the next coupon payment date.

Platforms vary significantly in how clearly they present accrued interest at the time of trade. Fidelity and Interactive Brokers both display accrued interest as a separate line item in the bond order ticket before you confirm, which prevents cash balance surprises after settlement. Some equity-focused platforms show only the flat price and leave the buyer to calculate accrued interest manually using a day-count convention (30/360 for corporate bonds, actual/actual for Treasuries). For a bond trading close to its semi-annual coupon date, accrued interest can represent several hundred dollars on a $10,000 face value position — a meaningful temporary cash outflow that resolves at the next coupon payment.

Coupon payment handling and maturity proceeds management also vary by platform. Most brokers credit coupon payments directly to the core cash or sweep account; Interactive Brokers and Fidelity allow automatic reinvestment into money market funds, which maintains yield on cash between semi-annual coupon dates rather than letting it sit at zero. For investors building bond ladders — a common income strategy where bonds mature in a defined sequence across years — Schwab's Bond Ladder Builder explicitly tracks upcoming maturities and provides automated alerts before principal is returned, allowing for timely reinvestment at current rates.

• Confirm your broker's settlement calendar for the specific bond type you are buying — T+1 for Treasuries, T+2 for most corporate and muni bonds — before timing a large purchase around a planned cash need.
• Review the accrued interest line before confirming any bond trade; paying $10,240 for a $10,000 face value bond is normal when $240 in accrued interest is included, but the full price must be clearly itemized in the trade ticket before you commit.
• For TIPS, verify that your broker reflects the inflation-adjusted principal in your account value, not just the original face value; TIPS principal increases with each CPI adjustment and should be visible as a separate line in the position detail.
• Fidelity and Schwab automatically credit coupon payments to the core account with same-day availability; Interactive Brokers can route payments to a money market position, compounding yield between the payment date and your next reinvestment decision.
• Schwab's Bond Ladder Builder provides maturity scheduling, upcoming cash flow calendars, and yield-to-maturity projections at the portfolio level — essential for retirees using bonds as a structured income source.
• Vanguard's fixed income platform provides detailed confirmation documentation and semi-annual coupon schedules for individual bond positions, making it a reliable operational choice for long-term bond holders who rely on predictable cash flow timing.