FIDELITY GINNIE MAE FUND
FIDELITY GOVERNMENT
INCOME FUND
FIDELITY INTERMEDIATE
GOVERNMENT INCOME FUND
ANNUAL REPORT
JULY 31, 1999
(2_FIDELITY_LOGOS)(registered trademark)
CONTENTS
PRESIDENT'S MESSAGE 3 NED JOHNSON ON INVESTING
STRATEGIES
FIDELITY GINNIE MAE FUND
4 PERFORMANCE
7 FUND TALK: THE MANAGER'S
OVERVIEW
10 INVESTMENT CHANGES
11 INVESTMENTS
13 FINANCIAL STATEMENTS
FIDELITY GOVERNMENT INCOME FUND
17 PERFORMANCE
21 FUND TALK: THE MANAGER'S
OVERVIEW
24 INVESTMENT CHANGES
25 INVESTMENTS
30 FINANCIAL STATEMENTS
FIDELITY INTERMEDIATE
GOVERNMENT INCOME FUND
34 PERFORMANCE
37 FUND TALK: THE MANAGER'S
OVERVIEW
40 INVESTMENT CHANGES
41 INVESTMENTS
48 FINANCIAL STATEMENTS
NOTES 52 NOTES TO THE FINANCIAL
STATEMENTS
REPORT OF INDEPENDENT 57 THE AUDITORS' OPINION.
ACCOUNTANTS
OF SPECIAL NOTE 58
Third party marks appearing herein are the property of their
respective owners.
All other marks appearing herein are registered or unregistered
trademarks or service marks of FMR Corp. or an affiliated company.
This report is printed on recycled paper using soy-based inks.
THIS REPORT AND THE FINANCIAL STATEMENTS CONTAINED HEREIN ARE
SUBMITTED FOR THE GENERAL
INFORMATION OF THE SHAREHOLDERS OF THE FUNDS. THIS REPORT IS NOT
AUTHORIZED FOR DISTRIBUTION TO
PROSPECTIVE INVESTORS IN THE FUNDS UNLESS PRECEDED OR ACCOMPANIED BY
AN EFFECTIVE PROSPECTUS.
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED
BY, ANY DEPOSITORY INSTITUTION. SHARES ARE NOT INSURED BY THE FDIC,
FEDERAL RESERVE BOARD OR ANY OTHER AGENCY, AND ARE SUBJECT TO
INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT
INVESTED.
NEITHER THE FUNDS NOR FIDELITY DISTRIBUTORS CORPORATION IS A BANK.
FOR MORE INFORMATION ON ANY FIDELITY FUND, INCLUDING CHARGES AND
EXPENSES, CALL 1-800-544-8888
FOR A FREE PROSPECTUS. READ IT CAREFULLY BEFORE YOU INVEST OR SEND
MONEY.
PRESIDENT'S MESSAGE
(PHOTO_OF_EDWARD_C_JOHNSON_3D)
DEAR SHAREHOLDER:
In July, the steadily growing U.S. economy again sparked fears of
inflation and posed the threat of another Federal Reserve Board
interest-rate hike at its August policy meeting. Despite rising
profits and continued productivity gains at many U.S. corporations,
stock and bond markets sold off sharply toward the month's end.
Renewed jitters about inflation were sparked by a government report
that showed a larger-than-expected increase in the employment-cost
index.
While it's impossible to predict the future direction of the markets
with any degree of certainty, there are certain basic principles that
can help investors plan for their future needs.
The longer your investment time frame, the less likely it is that you
will be affected by short-term market volatility. A 10-year investment
horizon appropriate for saving for a college education, for example,
enables you to weather market cycles in a long-term fund, which may
have a higher risk potential, but also has a higher potential rate of
return.
An intermediate-length fund could make sense if your investment
horizon is two to four years, while a short-term bond fund could be
the right choice if you need your money in one or two years.
If your time horizon is less than a year, you might want to consider
moving some of your bond investment into a money market fund. These
funds seek income and a stable share price by investing in
high-quality, short-term investments. Of course, it's important to
remember that an investment in a money market fund is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. Although money market funds seek to preserve the
value of your investment at $1.00 per share, it is possible to lose
money by investing in these types of funds.
Finally, no matter what your time horizon or portfolio diversity, it
makes good sense to follow a regular investment plan, investing a
certain amount of money in a fund at the same time each month or
quarter and periodically reviewing your overall portfolio. By doing
so, you won't get caught up in the excitement of a rapidly rising
market, nor will you buy all your shares at market highs. While this
strategy - known as dollar cost averaging - won't assure a profit or
protect you from a loss in a declining market, it should help you
lower the average cost of your purchases. Of course, you should
consider your financial ability to continue your purchases through
periods of low price levels before undertaking such a strategy.
If you have questions, please call us at 1-800-544-8888, or visit our
web site at www.fidelity.com. We are available 24 hours a day, seven
days a week to provide you the information you need to make the
investments that are right for you.
Best regards,
Edward C. Johnson 3d
FIDELITY GINNIE MAE FUND
PERFORMANCE: THE BOTTOM LINE
There are several ways to evaluate a fund's historical performance.
You can look at the total percentage change in value, the average
annual percentage change or the growth of a hypothetical $10,000
investment. Total return reflects the change in the value of an
investment, assuming reinvestment of the fund's dividend income and
capital gains (the profits earned upon the sale of securities that
have grown in value). You can also look at the fund's income, as
reflected in its yield, to measure performance. If Fidelity had not
reimbursed certain fund expenses, the total returns and dividends
would have been lower.
CUMULATIVE TOTAL RETURNS
PERIODS ENDED JULY 31, 1999 PAST 1 YEAR PAST 5 YEARS PAST 10 YEARS
FIDELITY GINNIE MAE FUND 2.08% 39.71% 101.77%
LB GNMA 2.80% 43.90% 116.53%
GNMA Funds Average 1.57% 37.36% 100.62%
CUMULATIVE TOTAL RETURNS show the fund's performance in percentage
terms over a set period - in this case, one year, five years or 10
years. For example, if you had invested $1,000 in a fund that had a 5%
return over the past year, the value of your investment would be
$1,050. You can compare the fund's returns to the performance of the
Lehman Brothers GNMA Index - a market value-weighted index of
fixed-rate securities that represent interests in pools of mortgage
loans with original terms of 15 and 30 years and are issued by the
Government National Mortgage Association (GNMA). To measure how the
fund's performance stacked up against its peers, you can compare it to
the GNMA funds average, which reflects the performance of mutual funds
with similar objectives tracked by Lipper Inc. The past one year
average represents a peer group of 54 mutual funds. These benchmarks
include reinvested dividends and capital gains, if any, and exclude
the effect of sales charges.
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED JULY 31, 1999 PAST 1 YEAR PAST 5 YEARS PAST 10 YEARS
FIDELITY GINNIE MAE FUND 2.08% 6.92% 7.27%
LB GNMA 2.80% 7.55% 8.03%
GNMA Funds Average 1.57% 6.55% 7.20%
AVERAGE ANNUAL TOTAL RETURNS take the fund's cumulative return and
show you what would have happened if the fund had performed at a
constant rate each year. (Note: Lipper calculates average annual total
returns by annualizing each fund's total return, then taking an
arithmetic average. This may produce a different figure than that
obtained by averaging the cumulative total returns and annualizing the
result.)
$10,000 OVER 10 YEARS Ginnie Mae LB GNMA
00015 LB020
1989/07/31 10000.00 10000.00
1989/08/31 9905.75 9875.86
1989/09/30 9929.22 9938.31
1989/10/31 10141.29 10168.06
1989/11/30 10238.91 10284.34
1989/12/31 10309.54 10353.90
1990/01/31 10196.58 10266.82
1990/02/28 10255.81 10323.69
1990/03/31 10275.90 10350.60
1990/04/30 10160.38 10258.95
1990/05/31 10484.84 10580.35
1990/06/30 10632.19 10743.34
1990/07/31 10801.25 10941.86
1990/08/31 10773.57 10794.36
1990/09/30 10840.36 10877.38
1990/10/31 10960.24 11011.68
1990/11/30 11206.75 11261.74
1990/12/31 11392.08 11448.84
1991/01/31 11535.50 11619.95
1991/02/28 11582.06 11716.43
1991/03/31 11662.78 11800.96
1991/04/30 11749.17 11911.65
1991/05/31 11838.36 12008.89
1991/06/30 11852.64 12031.73
1991/07/31 12028.37 12237.37
1991/08/31 12242.86 12464.84
1991/09/30 12423.39 12684.44
1991/10/31 12592.46 12893.88
1991/11/30 12660.01 12983.24
1991/12/31 12937.65 13285.86
1992/01/31 12830.34 13121.35
1992/02/29 12967.47 13258.70
1992/03/31 12891.14 13183.30
1992/04/30 13001.36 13304.39
1992/05/31 13217.05 13538.72
1992/06/30 13364.99 13704.24
1992/07/31 13429.85 13824.32
1992/08/31 13578.36 14009.14
1992/09/30 13675.98 14133.79
1992/10/31 13565.43 14027.93
1992/11/30 13634.95 14091.90
1992/12/31 13804.42 14270.37
1993/01/31 13986.63 14449.86
1993/02/28 14110.93 14596.60
1993/03/31 14188.18 14676.57
1993/04/30 14236.75 14730.13
1993/05/31 14318.40 14831.18
1993/06/30 14458.71 14951.76
1993/07/31 14534.66 15014.72
1993/08/31 14570.81 15052.04
1993/09/30 14571.64 15064.99
1993/10/31 14621.46 15090.89
1993/11/30 14537.05 15069.31
1993/12/31 14648.19 15209.19
1994/01/31 14813.04 15328.76
1994/02/28 14673.60 15252.60
1994/03/31 14305.12 14840.82
1994/04/30 14190.71 14739.27
1994/05/31 14203.37 14781.42
1994/06/30 14155.34 14759.84
1994/07/31 14442.64 15047.73
1994/08/31 14478.62 15093.93
1994/09/30 14277.14 14881.44
1994/10/31 14258.81 14857.83
1994/11/30 14212.86 14815.94
1994/12/31 14355.77 14980.45
1995/01/31 14658.78 15290.68
1995/02/28 15035.82 15693.58
1995/03/31 15110.22 15770.50
1995/04/30 15314.98 16004.06
1995/05/31 15785.73 16492.76
1995/06/30 15877.06 16604.98
1995/07/31 15923.80 16640.01
1995/08/31 16072.38 16811.12
1995/09/30 16231.12 16975.63
1995/10/31 16363.01 17114.75
1995/11/30 16543.54 17312.52
1995/12/31 16739.51 17534.91
1996/01/31 16844.03 17657.02
1996/02/29 16717.45 17525.01
1996/03/31 16682.51 17480.32
1996/04/30 16629.21 17434.63
1996/05/31 16561.08 17375.98
1996/06/30 16746.34 17604.21
1996/07/31 16807.29 17670.47
1996/08/31 16818.59 17678.09
1996/09/30 17071.06 17974.11
1996/10/31 17407.56 18337.65
1996/11/30 17649.77 18604.47
1996/12/31 17552.68 18504.95
1997/01/31 17667.62 18647.12
1997/02/28 17715.43 18714.39
1997/03/31 17533.25 18529.83
1997/04/30 17800.20 18833.71
1997/05/31 17966.97 19026.91
1997/06/30 18185.00 19252.35
1997/07/31 18506.04 19601.68
1997/08/31 18471.18 19559.79
1997/09/30 18692.16 19819.75
1997/10/31 18879.44 20026.40
1997/11/30 18909.92 20087.84
1997/12/31 19080.00 20269.10
1998/01/31 19252.22 20464.84
1998/02/28 19283.41 20510.54
1998/03/31 19354.41 20597.36
1998/04/30 19476.72 20716.93
1998/05/31 19617.10 20858.34
1998/06/30 19664.86 20946.18
1998/07/31 19766.73 21063.98
1998/08/31 19921.96 21230.26
1998/09/30 20168.16 21481.34
1998/10/31 20121.21 21462.81
1998/11/30 20220.16 21584.16
1998/12/31 20298.44 21672.76
1999/01/31 20412.76 21826.86
1999/02/28 20341.55 21757.55
1999/03/31 20459.09 21889.28
1999/04/30 20538.07 21994.32
1999/05/31 20408.43 21883.47
1999/06/30 20265.12 21796.16
1999/07/30 20177.24 21653.47
IMATRL PRASUN SHR__CHT 19990731 19990811 141417 R00000000000123
$10,000 OVER 10 YEARS: Let's say hypothetically that $10,000 was
invested in Fidelity Ginnie Mae Fund on July 31, 1989. As the chart
shows, by July 31, 1999, the value of the investment would have grown
to $20,177 - a 101.77% increase on the initial investment. For
comparison, look at how the Lehman Brothers GNMA Index did over the
same period. With dividends and capital gains, if any, reinvested the
same $10,000 investment would have grown to $21,653 - a 116.53%
increase.
(checkmark)UNDERSTANDING
PERFORMANCE
How a fund did yesterday is
no guarantee of how it will
do tomorrow. Bond prices, for
example, generally move in
the opposite direction of
interest rates. In turn, the
share price, return and yield
of a fund that invests in bonds
will vary. That means if you
sell your shares during a
market downturn, you might
lose money. But if you can ride
out the market's ups and
downs, you may have a gain.
TOTAL RETURN COMPONENTS
YEARS ENDED JULY 31,
1999 1998 1997 1996 1995
Dividend returns 5.85% 6.63% 7.07% 6.58% 7.35%
Capital returns -3.77% 0.18% 3.04% -1.03% 2.91%
Total returns 2.08% 6.81% 10.11% 5.55% 10.26%
TOTAL RETURN COMPONENTS include both dividend returns and capital
returns. A dividend return reflects the actual dividends paid by the
fund. A capital return reflects both the amount paid by the fund to
shareholders as capital gain distributions and changes in the fund's
share price. Both returns assume the dividends or capital gains, if
any, paid by the fund are reinvested.
DIVIDENDS AND YIELD
PERIODS ENDED JULY 31, 1999 PAST 1 MONTH PAST 6 MONTHS PAST 1 YEAR
Dividends per share 5.42(cents) 31.72(cents) 63.88(cents)
Annualized dividend rate 6.05% 5.97% 5.91%
30-day annualized yield 6.30% - -
DIVIDENDS per share show the income paid by the fund for a set period.
If you annualize this number, based on an average share price of
$10.55 over the past one month, $10.72 over the past six months and
$10.81 over the past one year, you can compare the fund's income over
these three periods. The 30-day annualized YIELD is a standard formula
for all bond funds based on the yields of the bonds in the fund,
averaged over the past 30 days. This figure shows you the yield
characteristics of the fund's investments at the end of the period. It
also helps you compare funds from different companies on an equal
basis. If Fidelity had not reimbursed certain fund expenses, the yield
would have been 6.28%.
FIDELITY GINNIE MAE FUND
FUND TALK: THE MANAGER'S OVERVIEW
MARKET RECAP
The taxable-bond market had little
to show for its efforts during the
12-month period that ended July 31,
1999. The Lehman Brothers
Aggregate Bond Index - a
popular measure of taxable-bond
performance - returned 2.49% for
this period. The massive
flight-to-safety that resulted from the
credit crisis of the late summer and
early fall sent Treasuries soaring
and spread sectors - corporates,
mortgages and the like -
plummeting, resulting in a historic
widening in yield spreads. The
Federal Reserve Board's three
interest-rate cuts later in the fall
helped bond and equity markets
alike get back on their feet, and
sparked a sustained rally in spread
sectors in the first quarter of 1999,
as investors favored higher-yielding
alternatives to Treasuries. Strong
debt issuance and investors' fears
of an interest-rate hike, though,
halted the rally in spread sectors
during the last three months of the
period. The bond market shrugged
off the widely anticipated
quarter-point rate hike on June 30
and applauded the emergence of a
neutral Fed policy. In July, yield
spreads widened again as investors
ignored signs of moderating
economic growth and surrendered
to concerns over higher labor costs
and fears of further Fed tightening.
The Lehman Brothers Treasury Index
returned 2.70%, while the Lehman
Brothers Corporate Bond Index and
the Lehman Brothers
Mortgage-Backed Securities Index
had returns of 1.42% and 2.78%,
respectively, during the 12-month
period.
(photograph of Tom Silvia)
An interview with Tom Silvia, Portfolio Manager of Fidelity Ginnie Mae
Fund
Q. HOW DID THE FUND PERFORM, TOM?
A. For the 12-month period that ended July 31, 1999, the fund provided
a total return of 2.08%. To get a sense of how the fund did relative
to its competitors, the GNMA funds average returned 1.57% for the same
12-month period, according to Lipper Inc. Additionally, the Lehman
Brothers GNMA Index - which tracks the types of securities in which
the fund invests - returned 2.80% for the same period.
Q. WHAT WERE THE KEYS TO THE FUND'S PERFORMANCE?
A. The GNMA market's and the fund's returns were muted by a number of
unfavorable developments. Looking back to the beginning of the period
in August of 1998, investors had become increasingly concerned about
global economic and market stability. In response, investors flocked
to Treasury securities and shunned most other fixed-income investments
- - including Ginnie Mae securities - in the process. Investors also
were concerned about the rapid increase in mortgage prepayments that
occurred as interest rates fell and large numbers of homeowners
refinanced. Market participants generally dislike prepayment because
it forces them to forfeit higher-yielding securities and leaves them
to reinvest the proceeds at lower rates. Although rising interest
rates in the final months of the period put pressure on all
fixed-income securities, they actually held a silver lining because
Ginnie Mae prepayment activity slowed dramatically.
Q. WHY DID THE FUND OUTPACE ITS PEERS?
A. The main reason why the fund outpaced its peers was that its
duration - a measure of its interest-rate sensitivity - was shorter
than its average peer. Throughout the year, I kept the fund's duration
in line with the Ginnie Mae market as a whole - as measured by the
Lehman Brothers GNMA Index - which was shorter than the average of the
fund's peers. The shorter a fund's duration, the less its share price
will fall as interest rates rise. Having a shorter duration meant the
fund lagged its peers during periods when interest rates were on the
decline from August through October 1998. But the fund's shorter
duration benefited it when interest rates rose more recently.
Q. THAT SAID, THE FUND'S DURATION MORE THAN DOUBLED DURING THE PAST
SIX MONTHS. WHAT EXPLAINS THAT?
A. The duration of a GNMA security is connected to prepayment
activity. As interest rates decline, accelerated prepayment activity
shortens the expected life of a GNMA security, and ultimately shortens
its duration. When interest rates are on the rise and home-loan
refinancings slow, prepayment activity diminishes, and the expected
life and duration of a GNMA security lengthens. Because prepayments
declined dramatically in the final months of the period, the fund's
duration extended to 5.0 years at the end of July, up from 2.2 years
just six months earlier.
Q. WHAT CHANGES DID YOU MAKE DURING THE YEAR?
A. I began the period emphasizing "seasoned" securities, those that
contained mortgages that originated five to 10 years ago and carried
coupons of above 8%. Seasoned securities didn't prove as resilient to
prepayments as I had anticipated, which was disappointing. Although I
continued to maintain much of the fund's stake in those high-yielding,
seasoned securities, I recently added newly issued mortgage securities
with coupons of 7% and 7.5% at a time when I felt their prices were
extremely attractive. Even though they generally are more sensitive
than seasoned securities to being prepaid, interest rates likely would
have to decline 150 to 200 basis points (1.5 to 2 percentage points)
from current levels before prepayments of these securities accelerate.
In my view, the attractive yields they offered at the time I bought
them more than compensated for their prepayment risk.
Q. WHAT'S YOUR OUTLOOK, TOM?
A. I believe that Ginnie Mae securities are poised to perform better
than their Treasury counterparts over the long term. Toward the end of
the period, prepayments had decreased dramatically in response to
mortgage rates that topped 8%. If prepayment activity continues to be
low, I expect the unusually large difference in yield between Treasury
securities and Ginnie Mae securities to narrow. Narrowing yield
spreads would likely result in better price performance for Ginnie
Maes versus Treasuries. Even if the spread remains constant at a wide
level, the yield advantage Ginnie Maes offer likely will help them to
perform better than Treasuries.
THE VIEWS EXPRESSED IN THIS REPORT REFLECT THOSE OF THE PORTFOLIO
MANAGER ONLY THROUGH THE END OF THE PERIOD OF THE REPORT AS STATED ON
THE COVER AND DO NOT NECESSARILY REPRESENT THE VIEWS OF FIDELITY OR
ANY OTHER PERSON IN THE FIDELITY ORGANIZATION. ANY SUCH VIEWS ARE
SUBJECT TO CHANGE AT ANY TIME BASED UPON MARKET OR OTHER CONDITIONS
AND FIDELITY DISCLAIMS ANY RESPONSIBILITY TO UPDATE SUCH VIEWS. THESE
VIEWS MAY NOT BE RELIED ON AS INVESTMENT ADVICE AND, BECAUSE
INVESTMENT DECISIONS FOR A FIDELITY FUND ARE BASED ON NUMEROUS
FACTORS, MAY NOT BE RELIED ON AS AN INDICATION OF TRADING INTENT ON
BEHALF OF ANY FIDELITY FUND.
(checkmark)FUND FACTS
GOAL: to provide high current
income by investing mainly in
mortgage securities issued by
the Government National
Mortgage Association (Ginnie
Mae)
FUND NUMBER: 015
TRADING SYMBOL: FGMNX
START DATE: November 8,
1985
SIZE: as of July 31, 1999,
more than $1.8 billion
MANAGER: Tom Silvia, since
1998; manager, various Fidelity
and Spartan government funds;
joined Fidelity in 1993
TOM SILVIA ON MORTGAGE
PREPAYMENT ACTIVITY:
"Falling interest rates weighed
heavily on Ginnie Mae securities
during the past year because as
rates declined, the rate of
prepayment of mortgages
accelerated. But an analysis of
more current data shows
definitive signs that prepayment
activity has slowed.
"The MBA Refinancing Index -
one of the most widely watched
barometers of prepayment activity
- - rose to a record high of 4400 in
October 1998, 44 times the base
reading of 100 in 1990. During the
past year, the largest one-month
volume of mortgages issued
peaked at $85 billion.
"But rising interest rates in 1999
dramatically curtailed prepayment
activity. At the end of July, the
MBA refinancing activity dropped
to 458, a level almost 10 times off
its previous year's peak. In that
same month, the one-month
volume of newly created
mortgages dropped to $46 billion.
Because mortgage rates hovered
around 8% at the end of the
period, one-month volume is
forecast to go as low as $20 to $25
billion by year end."
FIDELITY GINNIE MAE FUND
INVESTMENT CHANGES
COUPON DISTRIBUTION AS OF
JULY 31, 1999
% OF FUND'S INVESTMENTS % OF FUND'S INVESTMENTS 6
MONTHS AGO
6 - 6.99% 20.3 18.5
7 - 7.99% 57.8 51.0
8 - 8.99% 12.8 16.8
9 - 9.99% 4.6 7.0
10% and over 2.3 2.6
COUPON DISTRIBUTION SHOWS THE RANGE OF STATED INTEREST RATES ON THE
FUND'S INVESTMENTS, EXCLUDING SHORT-TERM INVESTMENTS.
AVERAGE YEARS TO MATURITY AS
OF JULY 31, 1999
6 MONTHS AGO
Years 8.2 5.2
AVERAGE YEARS TO MATURITY IS BASED ON THE AVERAGE TIME REMAINING UNTIL
PRINCIPAL PAYMENTS ARE EXPECTED FROM EACH OF THE FUND'S BONDS,
WEIGHTED BY DOLLAR AMOUNT.
DURATION AS OF JULY 31, 1999
6 MONTHS AGO
Years 5.0 2.2
DURATION SHOWS HOW MUCH A BOND FUND'S PRICE FLUCTUATES WITH CHANGES IN
COMPARABLE INTEREST RATES. IF RATES RISE 1%, FOR EXAMPLE, A FUND WITH
A FIVE-YEAR DURATION IS LIKELY TO LOSE ABOUT 5% OF ITS VALUE. OTHER
FACTORS ALSO CAN INFLUENCE A BOND FUND'S PERFORMANCE AND SHARE PRICE.
ACCORDINGLY, A BOND FUND'S ACTUAL PERFORMANCE MAY DIFFER FROM THIS
EXAMPLE.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
ASSET ALLOCATION (% OF FUND'S
INVESTMENTS)
AS OF JULY 31, 1999 AS OF JANUARY 31, 1999
Mortgage Securities* 97.8% Mortgage Securities** 95.9%
Short-Term Investments 2.2% Short-Term Investments 4.1%
* GNMA SECURITIES 96.5% ** GNMA SECURITIES 94.3%
Row: 1, Col: 1, Value: 97.8 Row: 1, Col: 1, Value: 95.90000000000001
Row: 1, Col: 2, Value: 0.0 Row: 1, Col: 2, Value: 0.0
Row: 1, Col: 3, Value: 0.0 Row: 1, Col: 3, Value: 0.0
Row: 1, Col: 4, Value: 0.0 Row: 1, Col: 4, Value: 0.0
Row: 1, Col: 5, Value: 0.0 Row: 1, Col: 5, Value: 0.0
Row: 1, Col: 6, Value: 0.0 Row: 1, Col: 6, Value: 0.0
Row: 1, Col: 7, Value: 0.0 Row: 1, Col: 7, Value: 0.0
Row: 1, Col: 8, Value: 2.2 Row: 1, Col: 8, Value: 4.1
</TABLE>
FIDELITY GINNIE MAE FUND
INVESTMENTS JULY 31, 1999
Showing Percentage of Total Value of Investment in Securities
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
U.S. GOVERNMENT AGENCY -
MORTGAGE SECURITIES - 97.8%
PRINCIPAL AMOUNT (000S) VALUE (NOTE 1) (000S)
FANNIE MAE - 0.1%
9% 10/1/11 $ 126 $ 130
10.25% 10/1/18 295 319
11.5% 5/1/14 to 9/1/15 222 247
12.5% 11/1/13 to 7/1/16 719 809
13.25% 9/1/11 277 317
14% 11/1/12 8 10
1,832
FREDDIE MAC - 1.2%
8.5% 2/1/04 to 2/1/19 603 623
9% 7/1/08 to 7/1/21 4,301 4,487
9.75% 12/1/08 to 4/1/13 179 190
10% 10/1/04 to 11/1/20 6,556 7,005
10.25% 2/1/09 to 11/1/16 2,592 2,752
10.5% 5/1/10 to 12/1/20 4,320 4,655
11.25% 2/1/10 200 216
11.75% 11/1/11 96 104
12% 5/1/10 to 2/1/17 464 515
12.5% 11/1/12 to 5/1/15 992 1,110
13% 11/1/12 to 11/1/14 139 158
13.5% 1/1/13 to 12/1/14 45 52
21,867
GOVERNMENT NATIONAL MORTGAGE
ASSOCIATION - 96.5%
6% 10/15/23 to 1/15/29 50,933 46,938
6.5% 9/15/23 to 8/15/29 350,435 332,803
7% 3/15/22 to 8/15/29 824,561 804,297
7.5% 6/15/02 to 8/15/29 276,102 276,425
8% 7/15/01 to 12/15/27 183,325 187,332
8.5% 2/15/05 to 2/15/23 49,734 52,059
9% 5/15/08 to 12/15/24 33,028 35,038
9.5% 4/15/01 to 1/15/23 43,923 46,953
10% 10/15/00 to 2/15/25 6,931 7,562
10.5% 9/15/00 to 9/15/19 5,212 5,725
11% 1/15/10 to 7/15/20 4,379 4,868
11.5% 3/15/10 to 9/15/18 4,064 4,544
12% 1/15/00 to 11/15/15 706 797
U.S. GOVERNMENT AGENCY -
MORTGAGE SECURITIES -
CONTINUED
PRINCIPAL AMOUNT (000S) VALUE (NOTE 1) (000S)
GOVERNMENT NATIONAL MORTGAGE
ASSOCIATION - CONTINUED
13% 2/15/11 to 5/15/15 $ 673 $ 776
13.5% 5/15/10 to 1/15/15 316 364
1,806,481
TOTAL U.S. GOVERNMENT AGENCY 1,830,180
- - MORTGAGE SECURITIES
(Cost $1,884,745)
</TABLE>
CASH EQUIVALENTS - 2.2%
MATURITY AMOUNT (000S)
Investments in repurchase $ 40,574 40,557
agreements (U.S. Government
obligations), in a joint
trading account at 5.12%,
dated 7/30/99 due 8/2/99
(Cost $40,557)
TOTAL INVESTMENT IN $ 1,870,737
SECURITIES - 100%
(Cost $1,925,302)
OTHER INFORMATION
Purchases and sales of long-term U.S. government and government agency
obligations aggregated $1,285,181,000 and $904,556,000, respectively.
INCOME TAX INFORMATION
At July 31, 1999, the aggregate cost of investment securities for
income tax purposes was $1,932,091,000. Net unrealized depreciation
aggregated $61,354,000, of which $6,110,000 related to appreciated
investment securities and $67,464,000 related to depreciated
investment securities.
At July 31, 1999, the fund had a capital loss carryforward of
approximately $25,005,000 of which $9,123,000, $10,722,000, $4,754,000
and $406,000 will expire on July 31, 2002, 2003, 2004 and 2007,
respectively. Approximately $9,858,000, of which $9,123,000 and
$735,000 will expire on July 31, 2002 and 2003, respectively, was
acquired in the merger and is available to offset future capital gains
of the fund to the extent provided by regulations.
FIDELITY GINNIE MAE FUND
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
AMOUNTS IN THOUSANDS (EXCEPT
PER-SHARE AMOUNT) JULY 31, 1999
ASSETS
Investment in securities, at $ 1,870,737
value (including repurchase
agreements of $40,557) (cost
$1,925,302) - See
accompanying schedule
Cash 417
Receivable for investments 11,101
sold
Receivable for fund shares 2,938
sold
Interest receivable 10,955
TOTAL ASSETS 1,896,148
LIABILITIES
Payable for investments $ 49,115
purchased
Payable for fund shares 2,741
redeemed
Distributions payable 1,615
Accrued management fee 625
Other payables and accrued 614
expenses
TOTAL LIABILITIES 54,710
NET ASSETS $ 1,841,438
Net Assets consist of:
Paid in capital $ 1,929,422
Undistributed net investment 2,216
income
Accumulated undistributed net (35,635)
realized gain (loss) on
investments and foreign
currency transactions
Net unrealized appreciation (54,565)
(depreciation) on investments
NET ASSETS, for 176,077 $ 1,841,438
shares outstanding
NET ASSET VALUE, offering $10.46
price and redemption price
per share ($1,841,438
(divided by) 176,077 shares)
STATEMENT OF OPERATIONS
AMOUNTS IN THOUSANDS YEAR
ENDED JULY 31, 1999
INVESTMENT INCOME $ 87,104
Interest
EXPENSES
Management fee $ 5,321
Transfer agent fees 2,387
Accounting fees and expenses 333
Non-interested trustees' 4
compensation
Custodian fees and expenses 277
Registration fees 337
Audit 56
Legal 17
Total expenses before 8,732
reductions
Expense reductions (819) 7,913
NET INVESTMENT INCOME 79,191
REALIZED AND UNREALIZED GAIN (3,194)
(LOSS)
Net realized gain (loss) on
investment securities
Change in net unrealized (65,621)
appreciation (depreciation)
on investment securities
NET GAIN (LOSS) (68,815)
NET INCREASE (DECREASE) IN $ 10,376
NET ASSETS RESULTING FROM
OPERATIONS
OTHER INFORMATION
Expense reductions FMR $ 794
Reimbursement
Custodian credits 9
Transfer agent credits 16
$ 819
<TABLE>
<CAPTION>
<S> <C> <C>
STATEMENT OF CHANGES IN NET ASSETS
AMOUNTS IN THOUSANDS YEAR ENDED JULY 31, 1999 YEAR ENDED JULY 31, 1998
INCREASE (DECREASE) IN NET
ASSETS
Operations Net investment $ 79,191 $ 56,820
income
Net realized gain (loss) (3,194) 14,559
Change in net unrealized (65,621) (13,818)
appreciation (depreciation)
NET INCREASE (DECREASE) IN 10,376 57,561
NET ASSETS RESULTING FROM
OPERATIONS
Distributions to shareholders (73,154) (55,500)
from net investment income
Share transactions Net 875,680 349,964
proceeds from sales of shares
Net asset value of shares 609,769 -
issued in exchange for the
net assets of Spartan
Ginnie Mae Fund
Reinvestment of distributions 62,728 48,330
Cost of shares redeemed (561,191) (305,260)
NET INCREASE (DECREASE) IN 986,986 93,034
NET ASSETS RESULTING FROM
SHARE TRANSACTIONS
TOTAL INCREASE (DECREASE) 924,208 95,095
IN NET ASSETS
NET ASSETS
Beginning of period 917,230 822,135
End of period (including $ 1,841,438 $ 917,230
undistributed net investment
income of $2,216 and
distributions in excess of
net investment income of
$1,862, respectively)
OTHER INFORMATION
Shares
Sold 80,985 32,197
Issued in exchange for 56,971 -
shares of Spartan Ginnie
Mae Fund
Issued in reinvestment of 5,828 4,446
distributions
Redeemed (52,070) (28,087)
Net increase (decrease) 91,714 8,556
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
FINANCIAL HIGHLIGHTS
YEARS ENDED JULY 31, 1999 1998 1997 1996 1995
SELECTED PER-SHARE DATA
Net asset value, beginning of $ 10.870 $ 10.850 $ 10.530 $ 10.640 $ 10.360
period
Income from Investment .689 B .714 B .720 B .688 .721
Operations Net investment
income
Net realized and unrealized (.460) .004 .310 (.107) .292
gain (loss)
Total from investment .229 .718 1.030 .581 1.013
operations
Less Distributions
From net investment income (.639) (.698) (.710) (.691) (.713)
In excess of net realized gain - - - - (.020)
Total distributions (.639) (.698) (.710) (.691) (.733)
Net asset value, end of period $ 10.460 $ 10.870 $ 10.850 $ 10.530 $ 10.640
TOTAL RETURN A 2.08% 6.81% 10.11% 5.55% 10.26%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period $ 1,841 $ 917 $ 822 $ 790 $ 767
(in millions)
Ratio of expenses to average .64% D .72% D .76% .76% .75%
net assets
Ratio of expenses to average .64% .72% .75% C .75% C .75%
net assets after expense
reductions
Ratio of net investment 6.43% 6.58% 6.75% 6.69% 7.24%
income to average net assets
Portfolio turnover rate 73% E 172% 98% 107% 210%
</TABLE>
A THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT
BEEN REDUCED DURING THE PERIODS SHOWN.
B NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON AVERAGE
SHARES OUTSTANDING DURING THE PERIOD.
C FMR OR THE FUND HAS ENTERED INTO VARYING ARRANGEMENTS WITH THIRD
PARTIES WHO EITHER PAID OR REDUCED A PORTION OF THE FUND'S EXPENSES.
D FMR AGREED TO REIMBURSE A PORTION OF THE FUND'S EXPENSES DURING THE
PERIOD. WITHOUT THIS REIMBURSEMENT, THE FUND'S EXPENSE RATIO WOULD
HAVE BEEN HIGHER.
E THE PORTFOLIO TURNOVER RATE DOES NOT INCLUDE THE ASSETS ACQUIRED IN
THE MERGER.
FIDELITY GOVERNMENT INCOME FUND
PERFORMANCE: THE BOTTOM LINE
There are several ways to evaluate a fund's historical performance.
You can look at the total percentage change in value, the average
annual percentage change or the growth of a hypothetical $10,000
investment. Total return reflects the change in the value of an
investment, assuming reinvestment of the fund's dividend income and
capital gains (the profits earned upon the sale of securities that
have grown in value). You can also look at the fund's income, as
reflected in the fund's yield, to measure performance.
CUMULATIVE TOTAL RETURNS
PERIODS ENDED JULY 31, 1999 PAST 1 YEAR PAST 5 YEARS PAST 10 YEARS
FIDELITY GOVERNMENT INCOME 1.48% 36.07% 107.45%
LB Government Bond 2.74% 41.39% 110.40%
General U.S. Government Funds 0.87% 34.98% 94.72%
Average
CUMULATIVE TOTAL RETURNS show the fund's performance in percentage
terms over a set period - in this case, one year, five years or 10
years. For example, if you had invested $1,000 in a fund that had a 5%
return over the past year, the value of your investment would be
$1,050. You can compare the fund's returns to the performance of the
Lehman Brothers Government Bond Index - a market value-weighted index
of U.S. Government and government agency securities (other than
mortgage securities) with maturities of one year or more. To measure
how the fund's performance stacked up against its peers, you can
compare it to the general U.S. Government funds average, which
reflects the performance of mutual funds with similar objectives
tracked by Lipper Inc. The past one year average represents a peer
group of 180 mutual funds. These benchmarks include reinvested
dividends and capital gains, if any, and exclude the effect of sales
charges.
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED JULY 31, 1999 PAST 1 YEAR PAST 5 YEARS PAST 10 YEARS
FIDELITY GOVERNMENT INCOME 1.48% 6.35% 7.57%
LB Government Bond 2.74% 7.17% 7.72%
General U.S. Government Funds 0.87% 6.17% 6.87%
Average
AVERAGE ANNUAL TOTAL RETURNS take the fund's cumulative return and
show you what would have happened if the fund had performed at a
constant rate each year. (Note: Lipper calculates average annual total
returns by annualizing each fund's total return, then taking an
arithmetic average. This may produce a different figure than that
obtained by averaging the cumulative total returns and annualizing the
result.)
$10,000 OVER 10 YEARS
Government Income LB Government Bond
00054 LB003
1989/07/31 10000.00 10000.00
1989/08/31 9861.71 9831.71
1989/09/30 9900.50 9874.01
1989/10/31 10103.51 10129.54
1989/11/30 10195.91 10227.63
1989/12/31 10248.10 10244.90
1990/01/31 10115.49 10099.86
1990/02/28 10154.79 10120.02
1990/03/31 10167.16 10117.80
1990/04/30 10131.34 10028.56
1990/05/31 10341.34 10308.23
1990/06/30 10485.06 10471.42
1990/07/31 10618.99 10605.39
1990/08/31 10563.74 10457.70
1990/09/30 10642.78 10558.00
1990/10/31 10801.65 10730.50
1990/11/30 11040.68 10968.31
1990/12/31 11225.07 11137.93
1991/01/31 11306.45 11257.50
1991/02/28 11395.47 11321.94
1991/03/31 11443.15 11379.51
1991/04/30 11549.26 11504.40
1991/05/31 11608.18 11549.12
1991/06/30 11581.09 11532.74
1991/07/31 11724.49 11669.58
1991/08/31 12025.84 11940.17
1991/09/30 12300.57 12190.61
1991/10/31 12406.06 12297.34
1991/11/30 12521.58 12420.67
1991/12/31 13016.68 12843.83
1992/01/31 12793.89 12643.87
1992/02/29 12819.81 12693.25
1992/03/31 12735.93 12619.07
1992/04/30 12815.16 12698.57
1992/05/31 13078.80 12932.84
1992/06/30 13302.05 13118.18
1992/07/31 13711.13 13448.77
1992/08/31 13829.30 13574.10
1992/09/30 14012.52 13766.08
1992/10/31 13784.88 13567.46
1992/11/30 13794.65 13543.99
1992/12/31 14054.21 13772.06
1993/01/31 14387.19 14064.57
1993/02/28 14739.85 14346.23
1993/03/31 14818.08 14394.28
1993/04/30 14964.52 14504.99
1993/05/31 14904.85 14489.05
1993/06/30 15271.87 14810.57
1993/07/31 15369.54 14900.91
1993/08/31 15797.65 15233.50
1993/09/30 15859.95 15291.73
1993/10/31 15942.28 15349.53
1993/11/30 15716.12 15181.24
1993/12/31 15785.91 15239.92
1994/01/31 16040.08 15448.51
1994/02/28 15564.15 15121.45
1994/03/31 15149.44 14781.34
1994/04/30 15005.12 14665.09
1994/05/31 14992.29 14646.27
1994/06/30 14912.90 14612.61
1994/07/31 15245.85 14881.20
1994/08/31 15236.77 14884.08
1994/09/30 14938.39 14674.39
1994/10/31 14880.28 14663.32
1994/11/30 14867.09 14636.52
1994/12/31 14964.16 14725.54
1995/01/31 15245.10 14999.67
1995/02/28 15600.75 15322.51
1995/03/31 15687.36 15418.61
1995/04/30 15883.08 15620.11
1995/05/31 16516.51 16250.08
1995/06/30 16632.18 16374.75
1995/07/31 16567.32 16314.52
1995/08/31 16758.07 16506.28
1995/09/30 16912.46 16665.26
1995/10/31 17174.31 16919.02
1995/11/30 17435.75 17182.75
1995/12/31 17667.83 17426.32
1996/01/31 17762.39 17533.27
1996/02/29 17382.01 17176.10
1996/03/31 17236.29 17032.62
1996/04/30 17101.44 16923.89
1996/05/31 17073.43 16895.55
1996/06/30 17274.13 17113.66
1996/07/31 17318.93 17155.95
1996/08/31 17267.95 17117.65
1996/09/30 17559.18 17401.74
1996/10/31 17928.67 17784.59
1996/11/30 18222.03 18093.93
1996/12/31 18036.21 17909.26
1997/01/31 18055.72 17929.19
1997/02/28 18067.84 17953.77
1997/03/31 17872.68 17763.78
1997/04/30 18123.89 18020.19
1997/05/31 18265.63 18175.64
1997/06/30 18460.53 18379.58
1997/07/31 18985.33 18901.26
1997/08/31 18778.36 18714.38
1997/09/30 19070.91 18995.81
1997/10/31 19362.55 19324.42
1997/11/30 19456.25 19423.40
1997/12/31 19647.27 19626.45
1998/01/31 19938.87 19920.06
1998/02/28 19884.20 19866.03
1998/03/31 19940.02 19922.28
1998/04/30 20011.88 20011.96
1998/05/31 20208.51 20217.44
1998/06/30 20424.97 20447.29
1998/07/31 20441.46 20478.95
1998/08/31 20868.35 21011.71
1998/09/30 21396.08 21578.13
1998/10/31 21287.54 21504.62
1998/11/30 21300.16 21511.92
1998/12/31 21334.48 21559.97
1999/01/31 21474.96 21685.08
1999/02/28 20974.81 21169.37
1999/03/31 21053.71 21252.48
1999/04/30 21130.03 21300.63
1999/05/31 20909.72 21113.79
1999/06/30 20836.78 21070.81
1999/07/30 20745.00 21040.28
IMATRL PRASUN SHR__CHT 19990731 19990812 115526 R00000000000123
$10,000 OVER 10 YEARS: Let's say hypothetically that $10,000 was
invested in Fidelity Government Income Fund on July 31, 1989. As the
chart shows, by July 31, 1999, the value of the investment would have
grown to $20,745 - a 107.45% increase on the initial investment. For
comparison, look at how the Lehman Brothers Government Bond Index did
over the same period. With dividends and capital gains, if any,
reinvested, the same $10,000 investment would have grown to $21,040 -
a 110.40% increase.
(checkmark)UNDERSTANDING
PERFORMANCE
How a fund did yesterday is
no guarantee of how it will do
tomorrow. Bond prices, for
example, generally move in
the opposite direction of
interest rates. In turn, the
share price, return and yield
of a fund that invests in bonds
will vary. That means if you
sell your shares during a
market downturn, you might
lose money. But if you can ride
out the market's ups and
downs, you may have a gain.
TOTAL RETURN COMPONENTS
YEARS ENDED JULY 31,
1999 1998 1997 1996 1995
Dividend returns 5.89% 6.04% 7.22% 6.58% 6.78%
Capital returns -4.41% 1.63% 2.40% -2.04% 1.89%
Total returns 1.48% 7.67% 9.62% 4.54% 8.67%
TOTAL RETURN COMPONENTS include both dividend returns and capital
returns. A dividend return reflects the actual dividends paid by the
fund. A capital return reflects both the amount paid by the fund to
shareholders as capital gain distributions and changes in the fund's
share price. Both returns assume the dividends or capital gains, if
any, paid by the fund, are reinvested.
DIVIDENDS AND YIELD
PERIODS ENDED JULY 31, 1999 PAST 1 MONTH PAST 6 MONTHS PAST 1 YEAR
Dividends per share 4.76(cents) 27.73(cents) 59.89(cents)
Annualized dividend rate 5.82% 5.71% 6.00%
30-day annualized yield 5.76% - -
DIVIDENDS per share show the income paid by the fund for a set period.
If you annualize this number, based on an average share price of $9.63
over the past one month, $9.79 over the past six months and $9.98 over
the past one year, you can compare the fund's income over these three
periods. The 30-day annualized YIELD is a standard formula for all
bond funds based on the yields of the bonds in the fund, averaged over
the past 30 days. This figure shows you the yield characteristics of
the fund's investments at the end of the period. It also helps you
compare funds from different companies on an equal basis.
FIDELITY GOVERNMENT INCOME FUND
FUND TALK: THE MANAGER'S OVERVIEW
MARKET RECAP
The taxable-bond market had little
to show for its efforts during the
12-month period that ended July 31,
1999. The Lehman Brothers
Aggregate Bond Index - a
popular measure of taxable-bond
performance - returned 2.49% for
this period. The massive
flight-to-safety that resulted from the
credit crisis of the late summer and
early fall sent Treasuries soaring
and spread sectors - corporates,
mortgages and the like -
plummeting, resulting in a historic
widening in yield spreads. The
Federal Reserve Board's three
interest-rate cuts later in the fall
helped bond and equity markets
alike get back on their feet, and
sparked a sustained rally in spread
sectors in the first quarter of 1999,
as investors favored higher-yielding
alternatives to Treasuries. Strong
debt issuance and investors' fears
of an interest-rate hike, though,
halted the rally in spread sectors
during the last three months of the
period. The bond market shrugged
off the widely anticipated
quarter-point rate hike on June 30
and applauded the emergence of a
neutral Fed policy. In July, yield
spreads widened again as investors
ignored signs of moderating
economic growth and surrendered
to concerns over higher labor costs
and fears of further Fed tightening.
The Lehman Brothers Treasury Index
returned 2.70%, while the Lehman
Brothers Corporate Bond Index and
the Lehman Brothers
Mortgage-Backed Securities Index
had returns of 1.42% and 2.78%,
respectively, during the 12-month
period.
(photograph of Tom Silvia)
An interview with Tom Silvia, Portfolio Manager of Fidelity Government
Income Fund
Q. HOW DID THE FUND PERFORM, TOM?
A. For the 12-month period that ended July 31, 1999, the fund provided
a total return of 1.48%. To get a sense of how the fund did relative
to its competitors, the general U.S. government funds average returned
0.87% for the same 12-month period, according to Lipper Inc.
Additionally, the Lehman Brothers Government Bond Index - which tracks
the types of securities in which the fund invests - returned 2.74% for
the same period.
Q. WHY DID THE FUND PERFORM BETTER THAN THE AVERAGE FUND OF ITS TYPE,
BUT LAG THE LEHMAN BROTHERS GOVERNMENT BOND INDEX DURING THE PAST
YEAR?
A. Relative to its peers, the fund benefited from a
smaller-than-average stake in mortgage securities, which generally
fared poorly during the past year. Relative to its benchmark, the fund
was hurt by its larger stake in agencies, which lagged Treasuries, the
main component of the Lehman Brothers Government Bond Index.
Q. LET'S BEGIN WITH THE MORTGAGE SECURITIES SECTOR. WHAT WERE THE
PROBLEMS SPECIFIC TO THAT MARKET AND WHAT WAS YOUR RESPONSE TO THEM?
A. A rapid increase in the number of mortgage prepayments was the main
source of the mortgage market's problems. Falling interest rates
dropped home-loan rates to their lowest level in five years earlier in
the period. But what was good for homeowners generally was viewed
negatively by investors. Prices of mortgage securities, which
represent an ownership interest in mortgage loans made by financial
institutions, dropped in response to lower interest rates. As
homeowners refinanced at a pace not seen since 1993, the mortgages
outstanding were "prepaid," returning their principal to investors. In
turn, those investors were potentially forced to reinvest the proceeds
at lower interest rates. Actual prepayments, plus fears that
prepayments would continue to accelerate in the future, weighed
heavily on mortgage security prices throughout most of the period.
Toward the end of the period, however, prepayments declined
dramatically as interest rates reversed course and moved higher.
Q. IN LIGHT OF HIGHER INTEREST RATES, WHAT MORTGAGE SECURITIES DID YOU
BUY RECENTLY?
A. I sold some of the fund's holdings in 15-year securities and some
older, 30-year mortgages, replacing them with newly issued mortgage
securities that I felt offered the best combination of cheap prices,
attractive income and good potential for appreciation. In an
environment characterized by higher interest rates, the risk that
these newly issued securities will be refinanced is substantially
reduced.
Q. WHAT CHOICES DID YOU MAKE IN THE AGENCY MARKET?
A. I added more of both callable and non-callable agency securities at
what I felt were very attractive prices. Agency and other fixed-income
securities often contain a "call" provision, allowing their issuers to
redeem them at a stated point in time before maturity. Bond calls,
like home loan refinancings, typically occur when interest rates are
falling. Because I wanted to limit the fund's vulnerability to calls
and avoid the potential for reinvesting at lower interest rates, I
emphasized "non-callable" securities throughout much of the period.
While the majority of the fund's agency holdings still are
non-callable, I've recently added some callable securities. Not only
did they offer higher yields than non-callable securities, but I
purchased them at a time when I felt their prices were attractive on a
historical basis relative to their non-callable counterparts.
Q. WHAT'S YOUR OUTLOOK, TOM?
A. I believe that agency and mortgage securities are poised to perform
better than Treasuries over the long term, which is why I'll most
likely keep relatively large weightings in them. The problems that
agencies and mortgages experienced over the past year were mostly the
result of too much supply as homeowners refinanced at a rapid pace and
government agencies stepped up their issuance of new securities. As a
reflection of the supply glut, there was a historically large
difference in yields between agency and Treasury securities and
mortgage and Treasury securities. To the extent that those spread
relationships return to more normal levels, agency and mortgage
securities are poised to benefit. Even if spreads remain constant, the
yield advantage of mortgage and agency securities could help them to
perform better than Treasuries.
THE VIEWS EXPRESSED IN THIS REPORT REFLECT THOSE OF THE PORTFOLIO
MANAGER ONLY THROUGH THE END OF THE PERIOD OF THE REPORT AS STATED ON
THE COVER AND DO NOT NECESSARILY REPRESENT THE VIEWS OF FIDELITY OR
ANY OTHER PERSON IN THE FIDELITY ORGANIZATION. ANY SUCH VIEWS ARE
SUBJECT TO CHANGE AT ANY TIME BASED UPON MARKET OR OTHER CONDITIONS
AND FIDELITY DISCLAIMS ANY RESPONSIBILITY TO UPDATE SUCH VIEWS. THESE
VIEWS MAY NOT BE RELIED ON AS INVESTMENT ADVICE AND, BECAUSE
INVESTMENT DECISIONS FOR A FIDELITY FUND ARE BASED ON NUMEROUS
FACTORS, MAY NOT BE RELIED ON AS AN INDICATION OF TRADING INTENT ON
BEHALF OF ANY FIDELITY FUND.
(checkmark)FUND FACTS
GOAL: high current income
with preservation of capital
FUND NUMBER: 054
TRADING SYMBOL: FGOVX
START DATE: April 4, 1979
SIZE: as of July 31, 1999,
more than $1.5 billion
MANAGER: Tom Silvia, since
1998; manager, various Fidelity
and Spartan government funds;
joined Fidelity in 1993
TOM SILVIA ON TECHNICAL
FACTORS SHAPING THE
GOVERNMENT SECURITIES
MARKET:
"While higher interest rates have
been the primary factor
contributing to the performance
of various fixed-income securities
so far in 1999, supply also has played
a critical role. The supply of
Treasuries diminished, thanks
ultimately to the near decade-long
economic expansion in this
country. The continued strong
pace of the economy helped increase
tax collections and, in turn, reduce
the government's borrowing needs.
In fact, the Treasury abandoned
its traditional November auction of
30-year bonds, and will hold
auctions for them only in February
and August. More recently, the
government announced that it was
considering buying back
government debt in the year 2000,
something that hasn't been done for
at least a century.
"In contrast, agency securities
suffered from oversupply, which
was the key reason for their
lagging behind Treasuries during
the past year. Meanwhile,
government agencies such as Fannie
Mae and Freddie Mac have
dramatically stepped up their
issuance as part of their growth
initiatives."
FIDELITY GOVERNMENT INCOME FUND
INVESTMENT CHANGES
COUPON DISTRIBUTION AS OF
JULY 31, 1999
% OF FUND'S INVESTMENTS % OF FUND'S INVESTMENTS 6
MONTHS AGO
Less than 5% 0.0 0.9
5 - 5.99% 22.1 16.6
6 - 6.99% 24.8 23.5
7 - 7.99% 10.8 7.8
8 - 8.99% 25.3 29.0
9 - 9.99% 8.1 14.4
10% and over 4.5 3.8
COUPON DISTRIBUTION SHOWS THE RANGE OF STATED INTEREST RATES ON THE
FUND'S INVESTMENTS, EXCLUDING SHORT-TERM INVESTMENTS.
AVERAGE YEARS TO MATURITY AS
OF JULY 31, 1999
6 MONTHS AGO
Years 8.6 8.8
AVERAGE YEARS TO MATURITY IS BASED ON THE AVERAGE TIME REMAINING UNTIL
PRINCIPAL PAYMENTS ARE EXPECTED FROM EACH OF THE FUND'S BONDS,
WEIGHTED BY DOLLAR AMOUNT.
DURATION AS OF JULY 31, 1999
6 MONTHS AGO
Years 5.3 5.3
DURATION SHOWS HOW MUCH A BOND FUND'S PRICE FLUCTUATES WITH CHANGES IN
COMPARABLE INTEREST RATES. IF RATES RISE 1%, FOR EXAMPLE, A FUND WITH
A FIVE-YEAR DURATION IS LIKELY TO LOSE ABOUT 5% OF ITS VALUE. OTHER
FACTORS ALSO CAN INFLUENCE A BOND FUND'S PERFORMANCE AND SHARE PRICE.
ACCORDINGLY, A BOND FUND'S ACTUAL PERFORMANCE MAY DIFFER FROM THIS
EXAMPLE.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
<C>
ASSET ALLOCATION (% OF FUND'S
INVESTMENTS)
AS OF JULY 31, 1999 AS OF JANUARY 31, 1999
Mortgage Securities 19.9% Mortgage Securities 17.5%
CMOs and Other Mortgage CMOs and Other Mortgage
Related Securities 3.5% Related Securities 2.9%
U.S. Treasury Obligations 24.9% U.S. Treasury Obligations 28.2%
U.S. Government Agency U.S. Government Agency
Obligations 47.3% Obligations 47.4%
Short-Term Investments 4.4% Short-Term Investments 4.0%
Row: 1, Col: 1, Value: 19.9 Row: 1, Col: 1, Value: 17.5
Row: 1, Col: 2, Value: 0.0 Row: 1, Col: 2, Value: 0.0
Row: 1, Col: 3, Value: 3.5 Row: 1, Col: 3, Value: 2.9
Row: 1, Col: 4, Value: 0.0 Row: 1, Col: 4, Value: 0.0
Row: 1, Col: 5, Value: 24.9 Row: 1, Col: 5, Value: 28.2
Row: 1, Col: 6, Value: 0.0 Row: 1, Col: 6, Value: 0.0
Row: 1, Col: 7, Value: 47.3 Row: 1, Col: 7, Value: 47.4
Row: 1, Col: 8, Value: 4.4 Row: 1, Col: 8, Value: 4.0
</TABLE>
FIDELITY GOVERNMENT INCOME FUND
INVESTMENTS JULY 31, 1999
Showing Percentage of Total Value of Investment in Securities
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
U.S. GOVERNMENT AND
GOVERNMENT AGENCY
OBLIGATIONS - 72.2%
PRINCIPAL AMOUNT (000S) VALUE (NOTE 1) (000S)
U.S. GOVERNMENT AGENCY
OBLIGATIONS - 47.3%
Fannie Mae:
5.25% 1/15/09 $ 44,000 $ 39,552
5.625% 5/14/04 3,590 3,471
6% 5/15/08 3,000 2,860
6.25% 5/15/29 38,300 34,990
6.5% 4/29/09 54,000 51,258
Farm Credit System Financial
Assistance Corp.:
8.8% 6/10/05 10,983 12,143
9.375% 7/21/03 19,037 20,988
Federal Agricultural Mortgage 3,000 3,220
Corp. 8.07% 7/17/06
Federal Farm Credit Bank:
6.19% 11/3/04 2,000 1,963
6.2% 11/12/04 6,900 6,775
6.25% 9/24/04 7,300 7,196
7.35% 3/24/05 1,000 1,035
8.06% 1/4/05 7,600 8,102
Federal Home Loan Bank:
5.125% 4/17/01 13,100 12,920
5.285% 9/22/05 19,230 17,959
5.595% 3/27/01 11,100 11,017
5.78% 8/24/05 49,925 47,928
5.785% 2/9/05 26,900 25,908
6.07% 5/2/06 1,500 1,462
6.21% 11/4/04 11,330 11,128
6.26% 9/24/04 1,800 1,775
6.56% 9/17/04 1,585 1,584
6.575% 6/24/04 4,325 4,333
7.36% 7/1/04 7,110 7,352
7.38% 8/5/04 3,770 3,905
7.46% 9/9/04 6,015 6,242
7.58% 9/13/04 4,000 4,172
7.66% 7/20/04 6,460 6,767
8.09% 12/28/04 2,140 2,307
9.5% 2/25/04 2,355 2,629
Financing Corp. stripped 1,989 1,348
principal 0% 8/3/05
Freddie Mac:
6.505% 7/1/04 5,000 4,994
7.25% 4/28/04 2,000 2,059
U.S. GOVERNMENT AND
GOVERNMENT AGENCY
OBLIGATIONS - CONTINUED
PRINCIPAL AMOUNT (000S) VALUE (NOTE 1) (000S)
U.S. GOVERNMENT AGENCY
OBLIGATIONS - CONTINUED
Government Loan Trusts $ 13,212 $ 14,094
(assets of Trust guaranteed
by U.S. Government through
Agency for International
Development) 8.5% 4/1/06
Government Trust Certificates
(assets of Trust guaranteed
by U.S. Government through
Defense Security Assistance
Agency):
Class 1 C, 9.25% 11/15/01 37,094 38,538
Class 2 E, 9.4% 5/15/02 12,922 13,419
Class T 3, 9.625% 5/15/02 12,054 12,528
Guaranteed Export Trust
Certificates (assets of
Trust guaranteed by U.S.
Government through
Export-Import Bank):
Series 1994 A, 7.12% 4/15/06 11,278 11,500
Series 1994 F, 8.187% 12/15/04 9,459 9,859
Series 1995 A, 6.28% 6/15/04 8,674 8,681
Series 1995 B, 6.13% 6/15/04 21,524 21,464
Series 1996 A, 6.55% 6/15/04 13,102 13,197
Guaranteed Trade Trust
Certificates (assets of
Trust guaranteed by U.S.
Government through Export-
Import Bank):
Series 1994 B, 7.5% 1/26/06 7,342 7,608
Series 1994 A, 7.39% 6/26/06 30,333 31,204
Israel Export Trust 7,235 7,327
Certificates (assets of
Trust guaranteed by U.S.
Government through
Export-Import Bank) Series
1994 1, 6.88% 1/26/03
Overseas Private Investment
Corp. U.S. Government
guaranteed participation
certificate:
Series 1994 195, 6.08% 8,263 8,276
8/15/04 (callable)
Series 1998 196A, 5.926% 13,289 13,244
6/15/05
Private Export Funding Corp.:
secured:
5.8% 2/1/04 1,710 1,699
5.82% 6/15/03 (a) 21,500 20,999
6.31% 9/30/04 5,410 5,384
5.31% 11/15/03 (a) 41,500 39,349
State of Israel (guaranteed
by U.S. Government through
Agency for International
Development):
5.625% 9/15/03 40,680 39,595
5.75% 3/15/00 1,600 1,604
6.6% 2/15/08 25,515 25,558
6.625% 8/15/03 14,190 14,316
U.S. GOVERNMENT AND
GOVERNMENT AGENCY
OBLIGATIONS - CONTINUED
PRINCIPAL AMOUNT (000S) VALUE (NOTE 1) (000S)
U.S. GOVERNMENT AGENCY
OBLIGATIONS - CONTINUED
Student Loan Marketing
Association:
6.125% 12/1/05 $ 4,190 $ 4,086
8.14% 5/17/04 1,500 1,599
U.S. Department of Housing
and Urban Development
government guaranteed
participation certificates:
Series 99 A:
5.75% 8/1/06 9,300 8,878
5.96% 8/1/09 9,930 9,432
U.S. Trade Trust Certificates 4,672 4,933
(assets of Trust guaranteed
by U.S. government through
Export-Import Bank) 8.17%
1/15/07
TOTAL U.S. GOVERNMENT AGENCY 759,713
OBLIGATIONS
U.S. TREASURY OBLIGATIONS -
24.9%
U.S. Treasury Bonds:
8.75% 5/15/17 153,840 191,943
8.875% 8/15/17 123,765 156,311
14% 11/15/11 17,800 25,768
U.S. Treasury Notes 5.75% 27,000 27,080
11/15/00
TOTAL U.S. TREASURY 401,102
OBLIGATIONS
TOTAL U.S. GOVERNMENT AND 1,160,815
GOVERNMENT AGENCY OBLIGATIONS
(Cost $1,205,934)
U.S. GOVERNMENT AGENCY -
MORTGAGE SECURITIES - 19.9%
FANNIE MAE - 12.8%
5.5% 5/1/09 to 3/1/24 7,730 7,060
6% 11/1/09 to 7/1/20 31,328 30,132
6.5% 10/1/28 to 6/1/29 64,765 61,688
7% 7/1/13 to 4/1/29 61,876 60,487
7% 8/1/29 (b) 14,129 13,811
8% 1/1/22 942 959
9.5% 11/15/09 to 10/1/20 13,381 14,251
10% 8/1/10 868 912
11% 3/1/10 645 688
11.5% 6/1/19 to 5/1/28 13,205 14,822
204,810
U.S. GOVERNMENT AGENCY -
MORTGAGE SECURITIES -
CONTINUED
PRINCIPAL AMOUNT (000S) VALUE (NOTE 1) (000S)
FREDDIE MAC - 1.1%
8% 1/1/10 to 6/1/11 $ 761 $ 778
8.5% 8/1/08 to 12/1/10 1,307 1,349
9% 8/1/09 to 12/1/10 784 816
9.75% 8/1/14 930 990
10.5% 7/1/20 to 12/1/20 13,258 14,307
18,240
GOVERNMENT NATIONAL MORTGAGE
ASSOCIATION - 6.0%
6% 7/15/08 to 12/15/10 40,650 39,237
7% 1/15/29 to 6/15/29 15,761 15,363
9.5% 7/15/09 to 2/15/25 23,210 24,870
10% 12/15/09 to 1/15/26 15,231 16,623
96,093
TOTAL U.S. GOVERNMENT AGENCY 319,143
- - MORTGAGE SECURITIES
(Cost $326,497)
COLLATERALIZED MORTGAGE
OBLIGATIONS - 3.5%
U.S. GOVERNMENT AGENCY - 3.5%
Fannie Mae planned 14,425 14,254
amortization class Series
1994-72 Class G, 6% 10/25/19
Federal Home Loan Mortgage 16,650 16,515
Corp. 6% 10/15/06
Freddie Mac planned 26,500 25,117
amortization class Series
1380 Class L, 5% 10/15/07
TOTAL COLLATERALIZED MORTGAGE 55,886
OBLIGATIONS
(Cost $57,381)
</TABLE>
CASH EQUIVALENTS - 4.4%
MATURITY AMOUNT (000S)
Investments in repurchase $ 70,486 70,456
agreements (U.S. Government
obligations), in a joint
trading account at 5.12%,
dated 7/30/99 due 8/2/99
(Cost $70,456)
TOTAL INVESTMENT IN $ 1,606,300
SECURITIES - 100%
(Cost $1,660,268)
LEGEND
(a) Security exempt from registration under Rule 144A of the
Securities Act of 1933. These securities may be resold in
transactions exempt from registration, normally to qualified
institutional buyers. At the period end, the value of these securities
amounted to $60,348,000 or 3.8% of net assets.
(b) Security purchased on a delayed delivery or when-issued basis.
OTHER INFORMATION
Purchases and sales of long-term U.S. government and government agency
obligations aggregated $2,909,103,000 and $2,527,745,000,
respectively.
INCOME TAX INFORMATION
At July 31, 1999, the aggregate cost of investment securities for
income tax purposes was $1,664,098,000. Net unrealized depreciation
aggregated $57,798,000, of which $139,000 related to appreciated
investment securities and $57,937,000 related to depreciated
investment securities.
A total of 37.86% of the dividends distributed during the fiscal year
was derived from interest on U.S. Government securities which is
generally exempt from state income tax. The fund will notify
shareholders in January 2000 of the applicable percentage for use in
preparing 1999 income tax returns. (Unaudited)
FIDELITY GOVERNMENT INCOME FUND
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
AMOUNTS IN THOUSANDS (EXCEPT
PER-SHARE AMOUNT) JULY 31, 1999
ASSETS
Investment in securities, at $ 1,606,300
value (including repurchase
agreements of $70,456) (cost
$1,660,268) - See
accompanying schedule
Receivable for investments 9,519
sold
Receivable for fund shares 2,989
sold
Interest receivable 22,483
TOTAL ASSETS 1,641,291
LIABILITIES
Payable for investments $ 42,389
purchased Regular delivery
Delayed delivery 13,971
Payable for fund shares 3,066
redeemed
Distributions payable 582
Accrued management fee 573
Other payables and accrued 478
expenses
TOTAL LIABILITIES 61,059
NET ASSETS $ 1,580,232
Net Assets consist of:
Paid in capital $ 1,648,501
Undistributed net investment 3,297
income
Accumulated undistributed net (17,598)
realized gain (loss) on
investments and foreign
currency transactions
Net unrealized appreciation (53,968)
(depreciation) on investments
NET ASSETS, for 165,608 $ 1,580,232
shares outstanding
NET ASSET VALUE, offering $9.54
price and redemption price
per share ($1,580,232
(divided by) 165,608 shares)
STATEMENT OF OPERATIONS
AMOUNTS IN THOUSANDS YEAR
ENDED JULY 31, 1999
INVESTMENT INCOME $ 103,234
Interest (including income on
securities loaned of $2)
EXPENSES
Management fee $ 6,771
Transfer agent fees 3,128
Accounting fees and expenses 372
Non-interested trustees' 5
compensation
Custodian fees and expenses 113
Registration fees 194
Audit 46
Legal 23
Total expenses before 10,652
reductions
Expense reductions (121) 10,531
NET INVESTMENT INCOME 92,703
REALIZED AND UNREALIZED GAIN (11,048)
(LOSS)
Net realized gain (loss) on
investment securities
Change in net unrealized (67,679)
appreciation (depreciation)
on investment securities
NET GAIN (LOSS) (78,727)
NET INCREASE (DECREASE) IN $ 13,976
NET ASSETS RESULTING FROM
OPERATIONS
OTHER INFORMATION
Expense reductions Custodian $ 32
credits
Transfer agent credits 89
$ 121
<TABLE>
<CAPTION>
<S> <C> <C> <C>
STATEMENT OF CHANGES IN NET ASSETS
AMOUNTS IN THOUSANDS YEAR ENDED JULY 31, 1999 TEN MONTHS ENDED JULY 31, 1998 YEAR ENDED SEPTEMBER 30, 1997
INCREASE (DECREASE) IN NET
ASSETS
Operations Net investment $ 92,703 $ 57,760 $ 63,391
income
Net realized gain (loss) (11,048) 28,818 (622)
Change in net unrealized (67,679) (5,599) 18,125
appreciation (depreciation)
NET INCREASE (DECREASE) IN 13,976 80,979 80,894
NET ASSETS RESULTING FROM
OPERATIONS
Distributions to shareholders (94,127) (56,286) (66,908)
from net investment income
Share transactions Net 1,430,122 835,669 378,207
proceeds from sales of shares
Reinvestment of distributions 85,177 50,449 57,722
Cost of shares redeemed (1,107,827) (680,613) (376,059)
NET INCREASE (DECREASE) IN 407,472 205,505 59,870
NET ASSETS RESULTING FROM
SHARE TRANSACTIONS
TOTAL INCREASE (DECREASE) 327,321 230,198 73,856
IN NET ASSETS
NET ASSETS
Beginning of period 1,252,911 1,022,713 948,857
End of period (including $ 1,580,232 $ 1,252,911 $ 1,022,713
undistributed net investment
income of $3,297, $4,504 and
$581, respectively)
OTHER INFORMATION
Shares
Sold 142,123 84,090 39,114
Issued in reinvestment of 8,543 5,076 5,974
distributions
Redeemed (110,604) (68,444) (38,946)
Net increase (decrease) 40,062 20,722 6,142
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
FINANCIAL HIGHLIGHTS
YEARS ENDED JULY 31, 1999 1998 F 1997 G 1996 G 1995 G 1994 G
SELECTED PER-SHARE DATA
Net asset value, beginning of $ 9.980 $ 9.760 $ 9.620 $ 9.890 $ 9.330 $ 10.870
period
Income from Investment .588 D .481 D .625 D .670 .625 .626
Operations Net investment
income
Net realized and unrealized (.429) .208 .175 (.299) .564 (1.225)
gain (loss)
Total from investment .159 .689 .800 .371 1.189 (.599)
operations
Less Distributions
From net investment income (.599) (.469) (.660) (.641) (.609) (.631)
From net realized gain - - - - - (.310)
In excess of net realized - - - - (.020) -
gain
Total distributions (.599) (.469) (.660) (.641) (.629) (.941)
Net asset value, end of $ 9.540 $ 9.980 $ 9.760 $ 9.620 $ 9.890 $ 9.330
period
TOTAL RETURN B, C 1.48% 7.19% 8.61% 3.82% 13.21% (5.81)%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (in $ 1,580 $ 1,253 $ 1,023 $ 949 $ 897 $ 614
millions)
Ratio of expenses to average .68% .69% A .73% .72% .71% .69%
net assets
Ratio of expenses to average .67% E .68% A, E .72% E .71% E .71% .69%
net assets after expense
reductions
Ratio of net investment 5.91% 5.82% A 6.48% 6.52% 6.36% 6.26%
income to average net assets
Portfolio turnover rate 168% 289% A 199% 124% 391% 402%
</TABLE>
A ANNUALIZED
B TOTAL RETURNS FOR PERIODS OF LESS THAN ONE YEAR ARE NOT ANNUALIZED.
C THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT
BEEN REDUCED DURING THE PERIODS SHOWN.
D NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON AVERAGE
SHARES OUTSTANDING DURING THE PERIOD.
E FMR OR THE FUND HAS ENTERED INTO VARYING ARRANGEMENTS WITH THIRD
PARTIES WHO EITHER PAID OR REDUCED A PORTION OF THE FUND'S EXPENSES.
F FOR THE TEN MONTHS ENDED JULY 31, 1998.
G YEARS ENDED SEPTEMBER 30.
FIDELITY INTERMEDIATE GOVERNMENT INCOME FUND
PERFORMANCE: THE BOTTOM LINE
There are several ways to evaluate a fund's historical performance.
You can look at the total percentage change in value, the average
annual percentage change or the growth of a hypothetical $10,000
investment. Total return reflects the change in the value of an
investment, assuming reinvestment of the fund's dividend income and
capital gains (the profits earned upon the sale of securities that
have grown in value). You can also look at the fund's income, as
reflected in its yield, to measure performance. If Fidelity had not
reimbursed certain fund expenses, the total returns and dividends
would have been lower.
CUMULATIVE TOTAL RETURNS
PERIODS ENDED JULY 31, 1999 PAST 1 YEAR PAST 5 YEARS PAST 10 YEARS
FIDELITY INTERMEDIATE GOVT 3.20% 36.49% 91.35%
INCOME
LB Int Government Bond 4.05% 37.61% 101.69%
Short-Intermediate U.S. 2.86% 31.58% 90.27%
Government Funds Average
CUMULATIVE TOTAL RETURNS show the fund's performance in percentage
terms over a set period - in this case, one year, five years or 10
years. For example, if you had invested $1,000 in a fund that had a 5%
return over the past year, the value of your investment would be
$1,050. You can compare the fund's returns to the Lehman Brothers
Intermediate Government Bond Index - a market value-weighted index of
U.S. Government fixed-rate debt issues with maturities between one and
10 years. To measure how the fund's performance stacked up against its
peers, you can compare it to the short-intermediate U.S. Government
funds average, which reflects the performance of mutual funds with
similar objectives tracked by Lipper, Inc. The past one year average
represents a peer group of 95 mutual funds. These benchmarks include
reinvested dividends and capital gains, if any, and exclude the effect
of sales charges.
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED JULY 31, 1999 PAST 1 YEAR PAST 5 YEARS PAST 10 YEARS
FIDELITY INTERMEDIATE GOVT 3.20% 6.42% 6.70%
INCOME
LB Int Government Bond 4.05% 6.59% 7.27%
Short-Intermediate U.S. 2.86% 5.63% 6.64%
Government Funds Average
AVERAGE ANNUAL TOTAL RETURNS take the fund's cumulative return and
show you what would have happened if the fund had performed at a
constant rate each year. (Note: Lipper calculates average annual total
returns by annualizing each fund's total return, then taking an
arithmetic average. This may produce a different figure than that
obtained by averaging the cumulative total returns and annualizing the
result.)
$10,000 OVER 10 YEARS
Intermediate Govt Income LB Govt Intermediate
00452 LB008
1989/07/31 10000.00 10000.00
1989/08/31 9939.52 9864.82
1989/09/30 9990.13 9911.97
1989/10/31 10148.49 10119.91
1989/11/30 10230.45 10220.07
1989/12/31 10282.62 10250.16
1990/01/31 10269.93 10186.38
1990/02/28 10326.74 10224.11
1990/03/31 10350.99 10236.23
1990/04/30 10366.28 10201.88
1990/05/31 10521.82 10420.37
1990/06/30 10622.39 10557.35
1990/07/31 10748.70 10705.34
1990/08/31 10792.43 10666.71
1990/09/30 10878.74 10762.15
1990/10/31 10991.46 10911.93
1990/11/30 11120.26 11076.30
1990/12/31 11221.76 11229.68
1991/01/31 11346.92 11345.10
1991/02/28 11435.40 11413.81
1991/03/31 11529.67 11476.92
1991/04/30 11628.93 11595.48
1991/05/31 11689.04 11660.83
1991/06/30 11735.37 11670.48
1991/07/31 11869.73 11796.91
1991/08/31 12017.29 12020.79
1991/09/30 12139.31 12225.14
1991/10/31 12291.06 12365.04
1991/11/30 12335.70 12510.11
1991/12/31 12558.38 12814.16
1992/01/31 12497.45 12690.87
1992/02/29 12571.48 12730.40
1992/03/31 12556.40 12679.65
1992/04/30 12649.67 12793.50
1992/05/31 12776.08 12984.37
1992/06/30 12874.80 13171.43
1992/07/31 12911.96 13424.05
1992/08/31 13067.33 13561.26
1992/09/30 13157.39 13748.09
1992/10/31 13103.38 13583.04
1992/11/30 13164.03 13527.80
1992/12/31 13282.28 13702.06
1993/01/31 13396.28 13956.71
1993/02/28 13543.36 14162.40
1993/03/31 13614.73 14214.50
1993/04/30 13702.82 14325.65
1993/05/31 13748.05 14286.58
1993/06/30 13892.24 14493.40
1993/07/31 13939.47 14522.59
1993/08/31 14043.79 14738.84
1993/09/30 14092.03 14798.80
1993/10/31 14124.24 14833.83
1993/11/30 14030.60 14760.40
1993/12/31 14134.83 14821.48
1994/01/31 14281.97 14967.89
1994/02/28 14147.87 14762.42
1994/03/31 13966.17 14547.07
1994/04/30 13898.26 14452.98
1994/05/31 13883.87 14463.31
1994/06/30 13878.99 14466.23
1994/07/31 14019.28 14656.20
1994/08/31 14060.63 14698.87
1994/09/30 14030.18 14577.38
1994/10/31 14046.66 14580.30
1994/11/30 14014.34 14515.40
1994/12/31 14000.64 14562.79
1995/01/31 14212.19 14799.69
1995/02/28 14418.60 15085.11
1995/03/31 14487.21 15168.19
1995/04/30 14658.31 15344.02
1995/05/31 15037.96 15776.74
1995/06/30 15129.53 15877.12
1995/07/31 15162.66 15884.76
1995/08/31 15290.32 16015.90
1995/09/30 15402.15 16123.24
1995/10/31 15610.56 16299.96
1995/11/30 15786.93 16498.70
1995/12/31 15951.07 16661.50
1996/01/31 16086.68 16802.07
1996/02/29 15930.89 16624.45
1996/03/31 15842.21 16548.55
1996/04/30 15797.35 16500.27
1996/05/31 15788.39 16491.74
1996/06/30 15940.47 16659.26
1996/07/31 15995.47 16710.90
1996/08/31 16015.32 16729.99
1996/09/30 16219.69 16946.24
1996/10/31 16494.13 17224.02
1996/11/30 16702.59 17431.96
1996/12/31 16611.12 17338.09
1997/01/31 16671.69 17404.79
1997/02/28 16705.64 17433.08
1997/03/31 16597.80 17333.83
1997/04/30 16777.79 17529.42
1997/05/31 16908.99 17665.95
1997/06/30 17056.76 17817.08
1997/07/31 17364.73 18145.60
1997/08/31 17318.83 18076.21
1997/09/30 17518.90 18272.70
1997/10/31 17703.23 18485.58
1997/11/30 17758.48 18526.23
1997/12/31 17889.47 18677.13
1998/01/31 18112.03 18920.78
1998/02/28 18106.88 18900.79
1998/03/31 18162.95 18959.62
1998/04/30 18254.28 19050.12
1998/05/31 18368.78 19181.04
1998/06/30 18482.47 19310.16
1998/07/31 18541.71 19384.49
1998/08/31 18808.06 19751.19
1998/09/30 19208.57 20211.98
1998/10/31 19213.29 20245.44
1998/11/30 19158.19 20183.46
1998/12/31 19222.19 20262.06
1999/01/31 19321.07 20352.33
1999/02/28 19079.57 20073.21
1999/03/31 19181.70 20206.47
1999/04/30 19259.65 20261.09
1999/05/31 19138.35 20136.76
1999/06/30 19135.16 20166.05
1999/07/30 19134.62 20168.87
IMATRL PRASUN SHR__CHT 19990731 19990813 101143 R00000000000123
$10,000 OVER 10 YEARS: Let's say hypothetically that $10,000 was
invested in Fidelity Intermediate Government Income Fund on July 31,
1989. As the chart shows, by July 31, 1999, the value of the
investment would have grown to $19,135 - a 91.35% increase on the
initial investment. For comparison, look at how the Lehman Brothers
Intermediate Government Bond Index did over the same period. With
dividends and capital gains, if any, reinvested, the same $10,000
would have grown to $20,169 - a 101.69% increase.
(checkmark)UNDERSTANDING
PERFORMANCE
How a fund did yesterday is
no guarantee of how it will do
tomorrow. Bond prices, for
example, generally move in the
opposite direction of interest
rates. In turn, the share price,
return and yield of a fund that
invests in bonds will vary.
That means if you sell your
shares during a market
downturn, you might lose
money. But if you can ride out
the market's ups and downs,
you may have a gain.
TOTAL RETURN COMPONENTS
YEARS ENDED JULY 31,
1999 1998 1997 1996 1995
Dividend returns 6.47% 6.88% 7.11% 6.62% 6.60%
Capital returns -3.27% -0.10% 1.45% -1.13% 1.56%
Total returns 3.20% 6.78% 8.56% 5.49% 8.16%
TOTAL RETURN COMPONENTS include both dividend returns and capital
returns. A dividend return reflects the actual dividends paid by the
fund. A capital return reflects both the amount paid by the fund to
shareholders as capital gain distributions and changes in the fund's
share price. Both returns assume the dividends or capital gains, if
any, paid by the fund are reinvested.
DIVIDENDS AND YIELD
PERIODS ENDED JULY 31, 1999 PAST 1 MONTH PAST 6 MONTHS PAST 1 YEAR
Dividends per share 4.97(cents) 29.53(cents) 63.35(cents)
Annualized dividend rate 6.15% 6.19% 6.49%
30-day annualized yield 5.92% - -
DIVIDENDS per share show the income paid by the fund for a set period.
If you annualize this number, based on an average share price of $9.51
over the past one month, $9.62 over the past six months and $9.76 over
the past one year, you can compare the fund's income over these three
periods. The 30-day annualized YIELD is a standard formula for all
bond funds based on the yields of the bonds in the fund, averaged over
the past 30 days. This figure shows you the yield characteristics of
the fund's investments at the end of the period. It also helps you
compare funds from different companies on an equal basis. If Fidelity
had not reimbursed certain fund expenses, the yield would have been
5.90%.
FIDELITY INTERMEDIATE GOVERNMENT INCOME FUND
FUND TALK: THE MANAGER'S OVERVIEW
MARKET RECAP
The taxable-bond market had little
to show for its efforts during the
12-month period that ended July 31,
1999. The Lehman Brothers
Aggregate Bond Index - a
popular measure of taxable-bond
performance - returned 2.49% for
this period. The massive
flight-to-safety that resulted from the
credit crisis of the late summer and
early fall sent Treasuries soaring
and spread sectors - corporates,
mortgages and the like -
plummeting, resulting in a historic
widening in yield spreads. The
Federal Reserve Board's three
interest-rate cuts later in the fall
helped bond and equity markets
alike get back on their feet, and
sparked a sustained rally in spread
sectors in the first quarter of 1999,
as investors favored higher-yielding
alternatives to Treasuries. Strong
debt issuance and investors' fears
of an interest-rate hike, though,
halted the rally in spread sectors
during the last three months of the
period. The bond market shrugged
off the widely anticipated
quarter-point rate hike on June 30
and applauded the emergence of a
neutral Fed policy. In July, yield
spreads widened again as investors
ignored signs of moderating
economic growth and surrendered
to concerns over higher labor costs
and fears of further Fed tightening.
The Lehman Brothers Treasury Index
returned 2.70%, while the Lehman
Brothers Corporate Bond Index and
the Lehman Brothers
Mortgage-Backed Securities Index
had returns of 1.42% and 2.78%,
respectively, during the 12-month
period.
(photograph of Andrew Dudley)
An interview with Andrew Dudley, Portfolio Manager of Fidelity
Intermediate Government Income Fund
Q. HOW DID THE FUND PERFORM, ANDY?
A. For the 12-month period that ended July 31, 1999, the fund provided
a total return of 3.20%. To get a sense of how the fund did relative
to its competitors, the short-intermediate U.S. government funds
average returned 2.86% for the same 12-month period, according to
Lipper Inc. Additionally, the Lehman Brothers Intermediate Government
Bond Index - which tracks the types of securities in which the fund
invests - returned 4.05% for the same period.
Q. WHILE THE FUND OUTPACED THE AVERAGE FUND OF ITS TYPE, IT LAGGED ITS
BENCHMARK. WHAT ACCOUNTS FOR THAT DIVERGENCE IN PERFORMANCE?
A. Sector allocation was the main driver for both the fund's
outperformance of its peers and its underperformance of its benchmark.
Relative to its peers, the fund had a smaller weighting in mortgage
securities, which lagged agency securities as interest rates rose.
Relative to its benchmark, the fund had a larger stake in mortgage
securities - which are not included in the Lehman Brothers index - and
agency securities, which significantly lagged U.S. Treasury securities
- - the biggest component of the benchmark - during the period.
Q. WERE THERE ANY TYPES OF MORTGAGE SECURITIES THAT HELD UP BETTER
THAN OTHERS?
A. It depends on what period we're talking about. You may recall that
in the report to shareholders six months ago, I discussed the fund's
stake in securities made up of mortgages with coupons - the interest
rate the homeowner promises to pay - of 8% and higher. Generally
speaking, these "seasoned" securities are historically less
susceptible to prepayment that occurs when interest rates fall. For a
variety of reasons, homeowners with seasoned mortgages issued several
years ago had been resistant to refinancing their home loans, despite
being presented with opportunities to do so at lower interest rates.
During much of the past year, however, large numbers of both seasoned
and newer mortgages were prepaid as interest rates plummeted to
near-record lows. More recently, seasoned securities performed better
in response to declining prepayment activity.
Q. WHAT CHANGES DID YOU MAKE IN THE FUND'S MORTGAGE HOLDINGS?
A. I kept the fund's stake in mortgages more or less stable throughout
the year, but I added more securities made up of newly issued
mortgages with coupons of 6.5% to 7.5%. Given that rising interest
rates dramatically curtailed prepayment activity in the final two
months of the period, I felt that newly issued securities offered the
best combination of low prices, attractive income and total return
potential. At the end of the period, the fund's stake in mortgage
securities was about evenly divided between newly issued securities
and seasoned securities, which helped to generate income for the fund.
Q. HOW HAVE YOU ALTERED THE FUND'S STAKE IN AGENCY SECURITIES?
A. I increasingly tilted new purchases toward more liquid, or easily
traded, agency securities issued by the four largest agency issuers:
Fannie Mae, Freddie Mac, Federal Farm Credit Bank and Federal Home
Loan Association. Because of an increased amount of issuance from
those agencies, I was able to buy their securities at what I felt were
very attractive prices. What's more, the added liquidity that these
securities offer allows me to move in and out of them fairly easily
without paying a lot of additional trading costs.
Q. WHAT'S YOUR OUTLOOK, ANDY?
A. In my view, the disappointing performance of agency and mortgage
securities was caused by a glut of supply and flagging demand, rather
than a fundamental deterioration of credit quality. As a reflection of
that unfavorable supply and demand environment, spreads, or the
differences in yield between agency and Treasury securities, and
mortgage and Treasury securities, were at historically wide levels at
the end of the period. Over a reasonable period of time, I believe
that if we work through the supply glut, agency and mortgage
securities should outpace Treasuries. Even if the spreads remain
constant, the higher levels of income offered by agency and mortgage
securities could position them to outpace Treasuries. So I'll likely
continue tilting the fund's investments toward agency and mortgage
securities, which offer, in my opinion, the better potential for total
return.
THE VIEWS EXPRESSED IN THIS REPORT REFLECT THOSE OF THE PORTFOLIO
MANAGER ONLY THROUGH THE END OF THE PERIOD OF THE REPORT AS STATED ON
THE COVER AND DO NOT NECESSARILY REPRESENT THE VIEWS OF FIDELITY OR
ANY OTHER PERSON IN THE FIDELITY ORGANIZATION. ANY SUCH VIEWS ARE
SUBJECT TO CHANGE AT ANY TIME BASED UPON MARKET OR OTHER CONDITIONS
AND FIDELITY DISCLAIMS ANY RESPONSIBILITY TO UPDATE SUCH VIEWS. THESE
VIEWS MAY NOT BE RELIED ON AS INVESTMENT ADVICE AND, BECAUSE
INVESTMENT DECISIONS FOR A FIDELITY FUND ARE BASED ON NUMEROUS
FACTORS, MAY NOT BE RELIED ON AS AN INDICATION OF TRADING INTENT ON
BEHALF OF ANY FIDELITY FUND.
(checkmark)FUND FACTS
GOAL: high current income
with preservation of capital by
investing mainly in U.S.
government and agency
securities while maintaining a
dollar weighted average
maturity between three and
10 years
FUND NUMBER: 452
TRADING SYMBOL: FSTGX
START DATE: May 2, 1988
SIZE: as of July 31, 1999,
more than $874 million
MANAGER: Andrew Dudley,
since 1998; manager, various
Fidelity and Spartan government
and mortgage funds; joined
Fidelity in 1996
ANDREW DUDLEY ON CHANGES
IN THE GOVERNMENT SECURITIES
MARKET:
"The past year has marked an
important change in the
government securities market.
While the supply of Treasury
securities has decreased
somewhat, the supply of agency
securities has mushroomed. For two
years, the U.S. Treasury has been
reducing debt by issuing fewer new
securities as old ones mature.
Rising tax revenues stemming
from the 8 1/2-year U.S. economic
expansion have reduced the
government's borrowing needs. In
addition, the Treasury recently
announced two initiatives that
will further curtail the supply of
Treasury securities. First, the
department will no longer auction
30-year bonds in November, just
February and August. Second, the
Treasury announced it is planning
to buy back some $3.6 trillion in
bonds. The aim of that plan is to
retire higher-yielding, more costly
debt, although the government
hasn't yet announced which
Treasuries will be part of the
buyback. Taking up some of the
slack are government agencies,
which have issued tremendous
amounts of new debt over the past
12 months."
FIDELITY INTERMEDIATE GOVERNMENT INCOME FUND
INVESTMENT CHANGES
COUPON DISTRIBUTION AS OF
JULY 31, 1999
% OF FUND'S INVESTMENTS % OF FUND'S INVESTMENTS 6
MONTHS AGO
Less than 5% 1.4 1.1
5 - 5.99% 20.6 11.1
6 - 6.99% 26.2 29.0
7 - 7.99% 14.9 16.9
8 - 8.99% 4.7 8.3
9 - 9.99% 13.0 14.5
10 - 10.99% 4.2 5.6
11 - 11.99% 3.9 4.4
12% and over 8.1 7.1
COUPON DISTRIBUTION SHOWS THE RANGE OF STATED INTEREST RATES ON THE
FUND'S INVESTMENTS, EXCLUDING SHORT-TERM INVESTMENTS.
AVERAGE YEARS TO MATURITY AS
OF JULY 31, 1999
6 MONTHS AGO
Years 5.1 4.8
AVERAGE YEARS TO MATURITY IS BASED ON THE AVERAGE TIME REMAINING UNTIL
PRINCIPAL PAYMENTS ARE EXPECTED FROM EACH OF THE FUND'S BONDS,
WEIGHTED BY DOLLAR AMOUNT.
DURATION AS OF JULY 31, 1999
6 MONTHS AGO
Years 3.2 3.1
DURATION SHOWS HOW MUCH A BOND FUND'S PRICE FLUCTUATES WITH CHANGES IN
COMPARABLE INTEREST RATES. IF RATES RISE 1%, FOR EXAMPLE, A FUND WITH
A FIVE-YEAR DURATION IS LIKELY TO LOSE ABOUT 5% OF ITS VALUE. OTHER
FACTORS ALSO CAN INFLUENCE A BOND FUND'S PERFORMANCE AND SHARE PRICE.
ACCORDINGLY, A BOND FUND'S ACTUAL PERFORMANCE MAY DIFFER FROM THIS
EXAMPLE.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
ASSET ALLOCATION (% OF FUND'S
INVESTMENTS)
AS OF JULY 31, 1999 AS OF JANUARY 31, 1999
Mortgage Securities 23.2% Mortgage Securities 24.6%
CMOs and Other Mortgage CMOs and Other Mortgage
Related Securities 3.5% Related Securities 0.2%
U.S. Treasury Obligations 11.7% U.S. Treasury Obligations 9.2%
U.S. Government Agency U.S. Government Agency
Obligations 58.6% Obligations 64.0%
Short-Term Investments 3.0% Short-Term Investments 2.0%
Row: 1, Col: 1, Value: 23.2 Row: 1, Col: 1, Value: 24.6
Row: 1, Col: 2, Value: 0.0 Row: 1, Col: 2, Value: 0.0
Row: 1, Col: 3, Value: 3.5 Row: 1, Col: 3, Value: 0.2
Row: 1, Col: 4, Value: 0.0 Row: 1, Col: 4, Value: 0.0
Row: 1, Col: 5, Value: 11.7 Row: 1, Col: 5, Value: 9.199999999999999
Row: 1, Col: 6, Value: 0.0 Row: 1, Col: 6, Value: 0.0
Row: 1, Col: 7, Value: 58.6 Row: 1, Col: 7, Value: 64.0
Row: 1, Col: 8, Value: 3.0 Row: 1, Col: 8, Value: 2.0
</TABLE>
FIDELITY INTERMEDIATE GOVERNMENT INCOME FUND
INVESTMENTS JULY 31, 1999
Showing Percentage of Total Value of Investment in Securities
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
U.S. GOVERNMENT AND
GOVERNMENT AGENCY
OBLIGATIONS - 70.3%
PRINCIPAL AMOUNT (000S) VALUE (NOTE 1) (000S)
U.S. GOVERNMENT AGENCY
OBLIGATIONS - 58.6%
Fannie Mae:
5.125% 2/13/04 $ 4,260 $ 4,046
5.25% 1/15/09 9,000 8,090
5.625% 5/14/04 1,870 1,808
6.5% 4/29/09 12,700 12,055
6.69% 8/7/01 1,700 1,718
Farm Credit System Financial 33,770 37,231
Assistance Corp. 9.375%
7/21/03
Federal Agricultural Mortgage
Corp.:
6.92% 2/10/02 350 356
7.04% 8/10/05 2,050 2,094
Federal Farm Credit Bank:
5.54% 9/10/03 1,300 1,258
9.15% 2/14/05 500 559
Federal Home Loan Bank:
4.96% 10/7/05 8,100 7,430
5.125% 4/17/01 33,160 32,704
5.125% 2/26/02 1,300 1,269
5.35% 2/7/01 3,375 3,340
5.595% 3/27/01 2,200 2,184
5.6% 9/8/05 10,400 9,888
5.717% 8/25/03 4,500 4,385
6.26% 9/24/04 3,500 3,451
6.75% 4/10/06 1,000 1,006
7.36% 7/1/04 7,825 8,092
7.59% 3/10/05 1,940 2,029
8.09% 12/28/04 3,500 3,773
Financing Corp. stripped 5,000 4,521
principal 0% 4/6/01
Freddie Mac:
6.08% 12/17/04 14,275 13,934
6.505% 7/1/04 3,200 3,196
6.99% 7/5/06 2,000 2,028
Government Loan Trusts 10,657 11,368
(assets of Trust guaranteed
by U.S. Government through
Agency for International
Development) 8.5% 4/1/06
Government Trust Certificates
(assets of Trust guaranteed
by U.S. Government through
Defense Security Assistance
Agency):
Class 1-C, 9.25% 11/15/01 39,588 41,129
Class 2-E 9.4% 5/15/02 10,140 10,530
U.S. GOVERNMENT AND
GOVERNMENT AGENCY
OBLIGATIONS - CONTINUED
PRINCIPAL AMOUNT (000S) VALUE (NOTE 1) (000S)
U.S. GOVERNMENT AGENCY
OBLIGATIONS - CONTINUED
Government Trust Certificates
(assets of Trust guaranteed
by U.S. Government through
Defense Security Assistance
Agency): - continued
Class T-3, 9.625% 5/15/02 $ 5,372 $ 5,583
Guaranteed Export Trust
Certificates (assets of
Trust guaranteed by U.S.
Government through
Export-Import Bank):
Series 1993 C, 5.2% 10/15/04 1,146 1,115
Series 1993 D, 5.23% 5/15/05 883 857
Series 1994 A, 7.12% 4/15/06 36,281 36,996
Series 1994 C, 6.61% 9/15/99 27 27
Series 1994 F, 8.187% 12/15/04 5,022 5,234
Series 1995-A, 6.28% 6/15/04 4,241 4,245
Series 1996-A, 6.55% 6/15/04 7,723 7,779
Guaranteed Trade Trust
Certificates (assets of
Trust guaranteed by U.S.
Government through Export-
Import Bank):
Series 1992 A, 7.02% 9/1/04 5,738 5,842
Series 1994 B, 7.5% 1/26/06 728 754
Series 1994-A, 7.39% 6/26/06 7,000 7,201
Series 1997-A, 6.104% 7/15/03 12,922 12,914
Israel Export Trust 5,641 5,713
Certificates (assets of
Trust guaranteed by U.S.
Government through
Export-Import Bank) Series
1994 1, 6.88% 1/26/03
Overseas Private Investment
Corp. U.S. Government
guaranteed participation
certificate:
Series 1994 195, 6.08% 7,668 7,680
8/15/04 (callable)
Series 1996-A1, 6.726% 4,000 4,007
9/15/10 (callable)
Private Export Funding Corp.:
secured 5.48% 9/15/03 2,205 2,206
secured 5.65% 3/15/03 2,732 2,711
secured:
5.8% 2/1/04 5,590 5,554
5.82% 6/15/03 (a) 20,600 20,120
6.31% 9/30/04 2,830 2,816
6.86% 4/30/04 2,083 2,110
8.35% 1/31/01 3,800 3,927
5.31% 11/15/03 (a) 4,000 3,793
8.75% 6/30/03 3,215 3,472
U.S. GOVERNMENT AND
GOVERNMENT AGENCY
OBLIGATIONS - CONTINUED
PRINCIPAL AMOUNT (000S) VALUE (NOTE 1) (000S)
U.S. GOVERNMENT AGENCY
OBLIGATIONS - CONTINUED
State of Israel (guaranteed
by U.S. Government through
Agency for International
Development):
5.25% 9/15/00 $ 8,141 $ 8,085
5.625% 9/15/03 19,564 19,042
6.05% 8/15/00 5,780 5,792
6.6% 2/15/08 27,910 27,957
6.625% 8/15/03 26,675 26,912
7.75% 11/15/99 5,000 5,034
Tennessee Valley Authority 6% 4,060 4,061
11/1/00
U.S. Department of Housing
and Urban Development
government guaranteed
participation certificates:
Series 1996 A, 6.44% 8/1/99 5,500 5,500
Series 99 A:
5.75% 8/1/06 10,000 9,546
6.06% 8/1/10 10,000 9,504
U.S. Trade Trust Certificates 4,825 5,095
(assets of Trust guaranteed
by U.S. government through
Export-Import Bank) 8.17%
1/15/07
TOTAL U.S. GOVERNMENT AGENCY 514,656
OBLIGATIONS
U.S. TREASURY OBLIGATIONS -
11.7%
U.S. Treasury Bonds:
10.75% 8/15/05 8,700 10,743
11.75% 2/15/10 (callable) 5,100 6,410
12% 8/15/13 24,900 34,580
14% 11/15/11 9,575 13,861
U.S. Treasury Notes:
5.5% 5/31/03 24,500 24,186
7.875% 8/15/01 11,050 11,509
U.S. Treasury Notes - coupon
STRIPS:
0% 9/30/00 300 282
0% 9/30/01 300 266
0% 5/31/00 207 198
0% 10/31/00 142 133
0% 4/30/01 142 129
0% 5/31/01 207 187
0% 4/30/02 142 121
U.S. GOVERNMENT AND
GOVERNMENT AGENCY
OBLIGATIONS - CONTINUED
PRINCIPAL AMOUNT (000S) VALUE (NOTE 1) (000S)
U.S. TREASURY OBLIGATIONS -
CONTINUED
U.S. Treasury Notes - coupon
STRIPS: - continued
0% 5/31/02 $ 207 $ 176
0% 9/30/02 200 166
TOTAL U.S. TREASURY 102,947
OBLIGATIONS
TOTAL U.S. GOVERNMENT AND 617,603
GOVERNMENT AGENCY OBLIGATIONS
(Cost $634,987)
U.S. GOVERNMENT AGENCY -
MORTGAGE SECURITIES - 23.2%
FANNIE MAE - 13.7%
5.5% 1/1/09 to 2/1/09 8,058 7,659
6% 10/1/08 to 6/1/14 18,881 18,219
6.5% 10/1/28 to 6/1/29 24,855 23,675
7% 9/1/27 to 8/1/29 42,842 41,878
7% 8/1/29 (b) 5,101 4,986
8% 10/1/00 2 2
8.25% 12/1/01 5,330 5,507
9% 2/1/13 841 889
9.5% 11/15/09 2,467 2,648
10% 1/1/20 102 110
10.25% 10/1/09 to 10/1/18 230 248
11% 8/1/10 to 1/1/16 3,870 4,235
11.25% 11/1/10 to 1/1/16 779 860
11.5% 9/1/11 to 6/1/19 2,601 2,900
11.75% 7/1/13 57 63
12.25% 10/1/10 to 6/1/15 935 1,050
12.5% 9/1/07 to 7/1/16 2,236 2,529
12.75% 10/1/11 to 6/1/15 955 1,082
13% 6/1/11 to 7/1/15 894 1,014
13.25% 9/1/11 to 9/1/13 515 590
13.5% 7/1/11 to 12/1/14 30 35
14% 6/1/11 to 10/1/14 94 108
14.5% 7/1/14 19 22
15% 4/1/12 22 26
120,335
FREDDIE MAC - 4.5%
6.5% 5/1/08 1,749 1,721
U.S. GOVERNMENT AGENCY -
MORTGAGE SECURITIES -
CONTINUED
PRINCIPAL AMOUNT (000S) VALUE (NOTE 1) (000S)
FREDDIE MAC - CONTINUED
7% 6/1/01 to 8/1/01 $ 707 $ 709
8.5% 6/1/14 to 9/1/17 2,394 2,477
9% 11/1/09 to 8/1/16 781 808
9.5% 7/1/16 to 8/1/21 4,540 4,835
10% 12/1/00 to 3/1/21 7,917 8,516
10.5% 9/1/09 to 5/1/21 5,020 5,424
10.75% 7/1/13 115 124
11% 8/1/00 to 9/1/20 605 659
11.25% 2/1/10 to 10/1/14 720 781
11.5% 10/1/15 to 8/1/19 382 421
11.75% 1/1/10 to 10/1/15 162 176
12% 1/1/00 to 11/1/19 1,553 1,719
12.25% 2/1/11 to 8/1/15 481 535
12.5% 10/1/09 to 6/1/19 7,700 8,629
12.75% 2/1/10 to 1/1/11 149 166
13% 9/1/10 to 5/1/17 1,211 1,377
13.25% 11/1/10 to 12/1/14 125 141
13.5% 11/1/10 to 10/1/14 186 211
13.75% 10/1/14 10 10
14% 11/1/12 to 4/1/16 34 39
14.5% 12/1/10 to 9/1/12 72 84
14.75% 3/1/10 21 24
16.25% 7/1/11 7 8
39,594
GOVERNMENT NATIONAL MORTGAGE
ASSOCIATION - 5.0%
8% 9/15/06 to 11/15/07 776 796
8.5% 4/15/16 to 7/15/17 90 95
9% 4/15/16 to 5/15/17 231 245
9.5% 6/15/09 to 11/15/20 8,677 9,294
10% 11/15/09 to 11/15/20 4,047 4,398
10.5% 2/15/14 to 2/15/25 6,848 7,519
10.75% 12/15/09 to 3/15/10 202 220
11% 4/15/00 to 1/20/21 4,396 4,868
11.5% 3/15/10 to 1/15/21 11,974 13,401
12% 11/15/12 to 2/15/16 843 950
12.25% 1/15/14 50 56
12.5% 12/15/10 13 15
13% 1/15/11 to 12/15/14 768 881
13.25% 9/15/13 to 10/15/14 69 78
13.5% 5/15/10 to 12/15/14 346 396
U.S. GOVERNMENT AGENCY -
MORTGAGE SECURITIES -
CONTINUED
PRINCIPAL AMOUNT (000S) VALUE (NOTE 1) (000S)
GOVERNMENT NATIONAL MORTGAGE
ASSOCIATION - CONTINUED
14% 6/15/11 to 12/15/14 $ 67 $ 78
16% 4/15/13 38 46
17% 12/15/11 3 4
43,340
TOTAL U.S. GOVERNMENT AGENCY 203,269
- - MORTGAGE SECURITIES
(Cost $204,462)
COLLATERALIZED MORTGAGE
OBLIGATIONS - 3.5%
U.S. GOVERNMENT AGENCY - 3.5%
Fannie Mae:
planned amortization class 1,054 1,114
Series 1988-21 Class G, 9.5%
8/25/18
planned amortization class 7,800 7,707
Series 1994-72 Class G, 6%
10/25/19
5.95% 11/25/07 7,000 6,930
Fannie Mae Whole Loan 6% 6,800 6,702
2/25/20
Freddie Mac:
6% 12/15/08 4,792 4,741
7.5% 1/15/03 3,729 3,792
TOTAL COLLATERALIZED MORTGAGE 30,986
OBLIGATIONS
(Cost $31,331)
</TABLE>
CASH EQUIVALENTS - 3.0%
SHARES
Investments in repurchase 26,446,285 26,435
agreements (U.S. Government
obligations), in a joint
trading account at 5.12%,
dated 7/30/99 due 8/2/99
(Cost $26,435)
TOTAL INVESTMENT IN $ 878,293
SECURITIES - 100%
(Cost $897,215)
LEGEND
(a) Security exempt from registration under Rule 144A of the
Securities Act of 1933. These securities may be resold in
transactions exempt from registration, normally to qualified
institutional buyers. At the period end, the value of these securities
amounted to $23,913,000 or 2.7% of net assets.
(b) Security purchased on a delayed delivery or when-issued basis.
OTHER INFORMATION
Purchases and sales of long-term U.S. government and government agency
obligations aggregated $921,461,000 and $884,738,000, respectively.
INCOME TAX INFORMATION
At July 31, 1999, the aggregate cost of investment securities for
income tax purposes was $897,279,000. Net unrealized depreciation
aggregated $18,986,000, of which $2,212,000 related to appreciated
investment securities and $21,198,000 related to depreciated
investment securities.
At July 31, 1999, the fund had a capital loss carryforward of
approximately $66,116,000 of which $631,000, $6,681,000, $46,313,000,
$8,517,000 and $3,974,000 will expire on July 31, 2001, 2002, 2003,
2004 and 2005, respectively. Approximately $12,884,000 of which
$631,000, $6,681,000, $2,987,000, $1,883,000 and $702,000 will expire
on July 31, 2001, 2002, 2003, 2004 and 2005, respectively, was
acquired in the mergers and is available to offset future capital
gains of the fund to the extent provided by regulations..
A total of 16.29% of the dividends distributed during the fiscal year
was derived from interest on U.S Government securities which is
generally exempt from state income tax. The fund will notify
shareholders in January 2000 of the applicable percentage for use in
preparing 1999 income tax returns. (Unaudited)
FIDELITY INTERMEDIATE GOVERNMENT INCOME FUND
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
AMOUNTS IN THOUSANDS (EXCEPT
PER-SHARE AMOUNT) JULY 31, 1999
ASSETS
Investment in securities, at $ 878,293
value (including repurchase
agreements of $26,435) (cost
$897,215) - See
accompanying schedule
Receivable for investments 38,727
sold
Receivable for fund shares 722
sold
Interest receivable 12,626
TOTAL ASSETS 930,368
LIABILITIES
Payable for investments $ 46,897
purchased Regular delivery
Delayed delivery 5,058
Payable for fund shares 2,870
redeemed
Distributions payable 727
Accrued management fee 462
Other payables and accrued 26
expenses
TOTAL LIABILITIES 56,040
NET ASSETS $ 874,328
Net Assets consist of:
Paid in capital $ 966,814
Undistributed net investment 441
income
Accumulated undistributed net (74,005)
realized gain (loss) on
investments and foreign
currency transactions
Net unrealized appreciation (18,922)
(depreciation) on investments
NET ASSETS, for 92,399 shares $ 874,328
outstanding
NET ASSET VALUE, offering $9.46
price and redemption price
per share ($874,328 (divided
by) 92,399 shares)
STATEMENT OF OPERATIONS
AMOUNTS IN THOUSANDS YEAR
ENDED JULY 31, 1999
INVESTMENT INCOME $ 55,841
Interest (including income on
securities loaned of $6)
EXPENSES
Management fee $ 5,090
Non-interested trustees' 3
compensation
Total expenses before 5,093
reductions
Expense reductions (904) 4,189
NET INVESTMENT INCOME 51,652
REALIZED AND UNREALIZED GAIN (5,246)
(LOSS)
Net realized gain (loss) on
investment securities
Change in net unrealized (24,881)
appreciation (depreciation)
on investment securities
NET GAIN (LOSS) (30,127)
NET INCREASE (DECREASE) IN $ 21,525
NET ASSETS RESULTING FROM
OPERATIONS
OTHER INFORMATION
Expense reductions FMR $ 897
Reimbursement
Custodian credits 4
Transfer agent credits 3
$ 904
<TABLE>
<CAPTION>
<S> <C> <C>
STATEMENT OF CHANGES IN NET ASSETS
AMOUNTS IN THOUSANDS YEAR ENDED JULY 31, 1999 YEAR ENDED JULY 31, 1998
INCREASE (DECREASE) IN NET
ASSETS
Operations Net investment $ 51,652 $ 48,961
income
Net realized gain (loss) (5,246) 5,968
Change in net unrealized (24,881) (6,214)
appreciation (depreciation)
NET INCREASE (DECREASE) IN 21,525 48,715
NET ASSETS RESULTING FROM
OPERATIONS
Distributions to shareholders (50,841) (49,186)
from net investment income
Share transactions Net 284,648 255,811
proceeds from sales of shares
Net asset value of shares 71,358 -
issued in exchange for the
net assets of Spartan
Short-Intermediate
Government Fund
Net asset value of shares 122,989 -
issued in exchange for the
net assets of Fidelity
Short-Intermediate
Government Fund
Reinvestment of distributions 41,707 40,988
Cost of shares redeemed (320,889) (296,896)
NET INCREASE (DECREASE) IN 199,813 (97)
NET ASSETS RESULTING FROM
SHARE TRANSACTIONS
TOTAL INCREASE (DECREASE) 170,497 (568)
IN NET ASSETS
NET ASSETS
Beginning of period 703,831 704,399
End of period (including $ 874,328 $ 703,831
undistributed net investment
income of $441 and $1,867,
respectively)
OTHER INFORMATION
Shares
Sold 29,025 26,122
Issued in exchange for 7,363 -
shares of Spartan
Short-Intermediate
Government Fund
Issued in exchange for 12,662 -
shares of Fidelity
Short-Intermediate
Government Fund
Issued in reinvestment of 4,281 4,188
distributions
Redeemed (32,874) (30,301)
Net increase (decrease) 20,457 9
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
FINANCIAL HIGHLIGHTS
YEARS ENDED JULY 31, 1999 1998 1997 1996 1995
SELECTED PER-SHARE DATA
Net asset value, beginning $ 9.780 $ 9.790 $ 9.650 $ 9.760 $ 9.610
of period
Income from Investment .640 B .652 B .675 B .678 .610
Operations Net investment
income
Net realized and unrealized (.326) (.008) .124 (.150) .143
gain (loss)
Total from investment .314 .644 .799 .528 .753
operations
Less Distributions
From net investment income (.634) (.654) (.659) (.638) (.603)
Net asset value, end of period $ 9.460 $ 9.780 $ 9.790 $ 9.650 $ 9.760
TOTAL RETURN A 3.20% 6.78% 8.56% 5.49% 8.16%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period $ 874 $ 704 $ 704 $ 740 $ 817
(in millions)
Ratio of expenses to average .53% C .38% C .54% C .63% C .65%
net assets
Ratio of expenses to average .53% .38% .54% .62% D .65%
net assets after expense
reductions
Ratio of net investment 6.58% 6.65% 6.96% 6.89% 7.18%
income to average net assets
Portfolio turnover rate 117% E 188% 105% 105% 210%
</TABLE>
A THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT
BEEN REDUCED DURING THE PERIODS SHOWN.
B NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON AVERAGE
SHARES OUTSTANDING DURING THE PERIOD.
C FMR AGREED TO REIMBURSE A PORTION OF THE FUND'S EXPENSES DURING THE
PERIOD. WITHOUT THIS REIMBURSEMENT, THE FUND'S EXPENSE RATIO WOULD
HAVE BEEN HIGHER.
D FMR OR THE FUND HAS ENTERED INTO VARYING ARRANGEMENTS WITH THIRD
PARTIES WHO EITHER PAID OR REDUCED A PORTION OF THE FUND'S EXPENSES.
E THE PORTFOLIO TURNOVER RATE DOES NOT INCLUDE THE ASSETS ACQUIRED IN
THE MERGER.
NOTES TO FINANCIAL STATEMENTS
For the period ended July 31, 1999
1. SIGNIFICANT ACCOUNTING POLICIES.
Fidelity Ginnie Mae Fund, Fidelity Government Income Fund and Fidelity
Intermediate Government Income Fund (the funds) are funds of Fidelity
Income Fund (the trust). The trust is registered under the Investment
Company Act of 1940, as amended, as an open-end management investment
company organized as a Massachusetts business trust. Each fund is
authorized to issue an unlimited number of shares. The financial
statements have been prepared in conformity with generally accepted
accounting principles which require management to make certain
estimates and assumptions at the date of the financial statements. The
following summarizes the significant accounting policies of the funds:
SECURITY VALUATION. Securities are valued based upon a computerized
matrix system and/or appraisals by a pricing service, both of which
consider market transactions and dealer-supplied valuations.
Securities (including restricted securities) for which market
quotations are not readily available are valued at their fair value as
determined in good faith under consistently applied procedures under
the general supervision of the Board of Trustees. Short-term
securities with remaining maturities of sixty days or less for which
quotations are not readily available are valued at amortized cost or
original cost plus accrued interest, both of which approximate current
value.
INCOME TAXES. As a qualified regulated investment company under
Subchapter M of the Internal Revenue Code, each fund is not subject to
income taxes to the extent that it distributes substantially all of
its taxable income for the fiscal year. The schedules of investments
include information regarding income taxes under the caption "Income
Tax Information."
INVESTMENT INCOME. Interest income, which includes accretion of
original issue discount, is accrued as earned.
EXPENSES. Most expenses of the trust can be directly attributed to a
fund. Expenses which cannot be directly attributed are apportioned
among the funds in the trust.
DISTRIBUTIONS TO SHAREHOLDERS. Dividends are declared daily and paid
monthly from net interest income. Distributions to shareholders from
realized capital gains on investments, if any, are recorded on the
ex-dividend date.
Income and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted
accounting principles. These differences, which may result in
distribution reclassifications, are primarily due to differing
treatments for paydown gains/losses on certain securities, market
discount, capital loss carryforwards and losses deferred due to wash
sales and excise tax regulations. The fund also utilized earnings and
profits distributed to shareholders on redemption of shares as a part
of the dividends paid deduction for income tax purposes.
Permanent book and tax basis differences relating to shareholder
distributions will result in reclassifications to paid in capital.
Undistributed net investment income and accumulated undistributed net
realized gain (loss) on investments may include
1. SIGNIFICANT ACCOUNTING
POLICIES - CONTINUED
DISTRIBUTIONS TO SHAREHOLDERS -
CONTINUED
temporary book and tax basis differences which will reverse in a
subsequent period. Any taxable income or gain remaining at fiscal year
end is distributed in the following year.
SECURITY TRANSACTIONS. Security transactions are accounted for as of
trade date. Gains and losses on securities sold are determined on the
basis of identified cost.
2. OPERATING POLICIES.
JOINT TRADING ACCOUNT. Pursuant to an Exemptive Order issued by the
Securities and Exchange Commission (the SEC), certain funds, along
with other affiliated entities of Fidelity Management & Research
Company (FMR), may transfer uninvested cash balances into one or more
joint trading accounts. These balances are invested in one or more
repurchase agreements for U.S. Treasury or Federal Agency obligations.
REPURCHASE AGREEMENTS. The underlying U.S. Treasury or Federal Agency
securities are transferred to an account of the funds, or to the Joint
Trading Account, at a bank custodian. The securities are
marked-to-market daily and maintained at a value at least equal to the
principal amount of the repurchase agreement (including accrued
interest). FMR, the funds' investment adviser, is responsible for
determining that the value of the underlying securities remains in
accordance with the market value requirements stated above.
DELAYED DELIVERY TRANSACTIONS. Each fund may purchase or sell
securities on a delayed delivery basis. Payment and delivery may take
place after the customary settlement period for that security. The
price of the underlying securities and the date when the securities
will be delivered and paid for are fixed at the time the transaction
is negotiated. The market values of the securities purchased on a
delayed delivery basis are identified as such in each applicable
fund's schedule of investments. Each fund may receive compensation for
interest forgone in the purchase of a delayed delivery security. With
respect to purchase commitments, each fund identifies securities as
segregated in its records with a value at least equal to the amount of
the commitment. Losses may arise due to changes in the market value of
the underlying securities or if the counterparty does not perform
under the contract.
RESTRICTED SECURITIES. Certain funds are permitted to invest in
securities that are subject to legal or contractual restrictions on
resale. These securities generally may be resold in transactions
exempt from registration or to the public if the securities are
registered. Disposal of these securities may involve time-consuming
negotiations and expense, and prompt sale at an acceptable price may
be difficult. At the end of the period, no funds had investments in
restricted securities (excluding 144A issues).
3. PURCHASES AND SALES OF INVESTMENTS.
Information regarding purchases and sales of securities (other than
short-term
3. PURCHASES AND SALES OF INVESTMENTS - CONTINUED
securities), is included under the caption "Other Information" at the
end of each applicable fund's schedule of investments.
4. FEES AND OTHER TRANSACTIONS WITH AFFILIATES.
MANAGEMENT FEE. As the investment adviser for Fidelity Ginnie Mae Fund
and Fidelity Government Income Fund, FMR receives a monthly fee that
is calculated on the basis of a group fee rate plus a fixed individual
fund fee rate applied to the average net assets of each fund. The
group fee rate is the weighted average of a series of rates and is
based on the monthly average net assets of all the mutual funds
advised by FMR. The rates ranged from .1100% to .3700% for the period.
The annual individual fund fee rate is .30%. In the event that these
rates were lower than the contractual rates in effect during the
period, FMR voluntarily implemented the above rates, as they resulted
in the same or a lower management fee. For the period, the management
fees were equivalent to an annual rate of .43% of average net assets
for Fidelity Ginnie Mae Fund and Fidelity Government Income Fund.
As the investment adviser for Fidelity Intermediate Government Income
Fund, FMR pays all expenses, except the compensation of the
non-interested Trustees and certain exceptions such as interest,
taxes, brokerage commissions and extraordinary expenses. The
management fee paid to FMR by the fund is reduced by an amount equal
to the fees and expenses paid to the non-interested Trustees. FMR
receives a fee that is computed daily at an annual rate of .65% of the
fund's average net assets.
SUB-ADVISER FEE. FMR, on behalf of each fund, has entered into a
sub-advisory agreement (effective January 1, 1999) with Fidelity
Investments Money Management, Inc. (FIMM), a wholly owned subsidiary
of FMR. For its services, FIMM receives a fee from FMR of 50% of the
management fee payable to FMR. The fee is paid prior to any voluntary
expense reimbursements which may be in effect.
TRANSFER AGENT FEES. Fidelity Service Company, Inc. (FSC), an
affiliate of FMR, is each funds' transfer, dividend disbursing and
shareholder servicing agent for Fidelity Ginnie Mae Fund and Fidelity
Government Income Fund. FSC receives account fees and asset-based fees
that vary according to account size and type of account. FSC pays for
typesetting, printing and mailing of all shareholder reports, except
proxy statements. For the period, the transfer agent fees were
equivalent to an annual rate of .19% and .20% of the average net
assets for Fidelity Ginnie Mae Fund and Fidelity Government Income
Fund, respectively.
ACCOUNTING FEES. FSC maintains each fund's accounting records for
Fidelity Ginnie Mae Fund and Fidelity Government Income Fund. The fee
is based on the level of average net assets for the month plus
out-of-pocket expenses.
5. SECURITY LENDING.
Fidelity Government Income Fund and Fidelity Intermediate Government
Income
5. SECURITY LENDING - CONTINUED
Fund loaned securities to brokers who paid the fund's negotiated
lenders' fees. These fees are included in interest income. Each
applicable fund receives U.S. Treasury obligations and/or cash as
collateral against the loaned securities, in an amount at least equal
to 102% of the market value of the loaned securities at the inception
of each loan. This collateral must be maintained at not less than 100%
of the market value of the loaned securities during the period of the
loan. The market value of the loaned securities is determined at the
close of business of the fund and any additional required collateral
is delivered to the fund on the next business day. At period end there
were no loans outstanding.
6. EXPENSE REDUCTIONS.
For Fidelity Ginnie Mae Fund and Fidelity Intermediate Government
Income Fund, FMR voluntarily agreed to reimburse each fund's operating
expenses (excluding interest, taxes, certain securities lending fees,
brokerage commissions and extraordinary expenses, if any) above an
annual rate of .63% of average net assets.
During the period, the Fidelity Ginnie Mae fund's expense limitation
ranged from .63% to .65% of average net assets.
During the period August 1, 1998 to December 31, 1998 and April 23,
1999 through the end of the period, Fidelity Intermediate Government
Income Fund's expense limitation ranged from .38% to .63% of average
net assets.
In addition, Fidelity Ginnie Mae Fund, Fidelity Government Income Fund
and FMR, on behalf of Fidelity Intermediate Government Income Fund,
have entered into arrangements with their custodian and transfer agent
whereby credits realized as a result of uninvested cash balances were
used to reduce a portion of each applicable fund's expenses. For the
period, the reductions under these arrangements are shown under the
caption "Other Information" on each applicable fund's Statement of
Operations.
7. MERGER INFORMATION.
On April 22, 1999, Fidelity Intermediate Government Income Fund
acquired all of the assets and assumed all of the liabilities of
Spartan Short-Intermediate Government Fund. The acquisition, which was
approved by the shareholders of Spartan Short-Intermediate Government
Fund on April 14, 1999, was accomplished by an exchange of 7,363,405
shares of the Fidelity Intermediate Government Income Fund (each
valued at $9.69) for the 7,680,451 shares then outstanding (each
valued at $9.29) of Spartan Short-Intermediate Government Fund. Based
on the opinion of fund counsel, the reorganization qualified as a
tax-free reorganization for federal income tax purposes with no gain
or loss recognized to the funds or their shareholders. Fidelity
Short-Intermediate Government Fund's net assets, including $638,690 of
unrealized depreciation, were
7. MERGER INFORMATION -
CONTINUED
combined with Fidelity Intermediate Government Income Fund for total
net assets after the acquisition of $803,238,766.
On April 29, 1999, Fidelity Intermediate Government Income Fund
acquired all of the assets and assumed all of the liabilities of
Fidelity Short-Intermediate Government Fund. The acquisition, which
was approved by the shareholders of Fidelity Short-Intermediate
Government Fund on April 14, 1999, was accomplished by an exchange of
12,662,423 shares of the Fidelity Intermediate Government Income Fund
(each valued at $9.71) for the 13,292,122 shares then outstanding
(each valued at $9.25) of Fidelity Short-Intermediate Government Fund.
Based on the opinion of fund counsel, the reorganization qualified as
a tax-free reorganization for federal income tax purposes with no gain
or loss recognized to the funds or their shareholders. Fidelity
Short-Intermediate Government Fund's net assets, including $674,931 of
unrealized depreciation, were combined with Fidelity Intermediate
Government Income Fund for total net assets after the acquisition of
$924,822,820.
On May 27, 1999, Fidelity Ginnie Mae Fund acquired all of the assets
and assumed all of the liabilities of Spartan Ginnie Mae Fund. The
acquisition, which was approved by the shareholders of Spartan Ginnie
Mae Fund on May 19, 1999, was accomplished by an exchange of
56,971,308 shares of the Fidelity Ginnie Mae Fund (each valued at
$10.70) for the 60,959,299 shares then outstanding (each valued at
$10.00) of Spartan Ginnie Mae Fund. Based on the opinion of fund
counsel, the reorganization qualified as a tax-free reorganization for
federal income tax purposes with no gain or loss recognized to the
funds or their shareholders. Spartan Ginnie Mae Fund's net assets,
including $3,850,708 of unrealized depreciation, were combined with
Fidelity Ginnie Mae Fund for total net assets after the acquisition of
$1,873,723,094.
8. BENEFICIAL INTEREST.
At the end of the period, one shareholder was record owner of
approximately 15% of the total outstanding shares of Fidelity
Government Income Fund.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees of Fidelity Income Fund and the Shareholders of
Fidelity Ginnie Mae Fund, Fidelity Government Income Fund and Fidelity
Intermediate Government Income Fund:
In our opinion, the accompanying statements of assets and liabilities,
including the schedules of investments, and the related statements of
operations and of changes in net assets and the financial highlights
present fairly, in all material respects, the financial position of
Fidelity Ginnie Mae Fund, Fidelity Government Income Fund and Fidelity
Intermediate Government Income Fund (each a fund of Fidelity Income
Fund) at July 31, 1999, and the results of their operations, the
changes in their net assets and the financial highlights for the
periods indicated, in conformity with generally accepted accounting
principles. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the
responsibility of the Fidelity Income Fund's management; our
responsibility is to express an opinion on these financial statements
based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits, which included confirmation
of securities at July 31, 1999 by correspondence with the custodian
and brokers, provide a reasonable basis for the opinion expressed
above.
/s/PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Boston, Massachusetts
September 8, 1999
OF SPECIAL NOTE
INTRODUCING FIDELITY'S NEW, REORGANIZED PROSPECTUS
Recently, the SEC issued new disclosure requirements for all mutual
fund prospectuses. While Fidelity could have complied by simply
following the new requirements, we saw a different opportunity. We saw
the chance to create a brand new prospectus: one that is better
organized, easier to use and more informative than ever.
The new format of the Fidelity mutual fund prospectus puts the
information you need to make informed investment decisions right at
your fingertips. In the opening pages, you will find the SEC-mandated
summary that highlights the fund's investment objectives, strategies
and risks. There's also an easy-to-read performance chart and fee
table right up front.
Inside, you will find additional features we've introduced to make the
fund prospectus a more useful tool. In our new Shareholder Information
section, for example, we have provided practical, beneficial
information - from how to buy or sell shares, key contact information,
investment services, ways to set up your account and more - all in one
convenient location.
We invite you to spend a moment and review our new prospectus. It is
designed to help make your investment decision easier, no matter which
of the Fidelity funds you invest in.
MANAGING YOUR INVESTMENTS
Fidelity offers several ways to conveniently manage your personal
investments via your telephone or PC. You can access your account
information, conduct trades and research your investments 24 hours a
day.
BY PHONE
Fidelity Automated Service Telephone provides a single toll-free
number to access account balances, positions, quotes and trading. It's
easy to navigate the service, and on your first call, the system will
help you create a personal identification number (PIN) for security.
(PHONE_GRAPHIC)FIDELITY AUTOMATED
SERVICE TELEPHONE (FASTSM)
1-800-544-5555
PRESS
1 For mutual fund and brokerage trading.
2 For quotes.*
3 For account balances and holdings.
4 To review orders and mutual
fund activity.
5 To change your PIN.
*0 To speak to a Fidelity representative.
BY PC
Fidelity's Web site on the Internet provides a wide range of
information, including daily financial news, fund performance,
interactive planning tools and news about Fidelity products and
services.
(COMPUTER_GRAPHIC)FIDELITY'S WEB SITE
WWW.FIDELITY.COM
If you are not currently on the Internet, call EarthLink Sprint at
1-800-288-2967, and be sure to ask for registration number SMD004 to
receive a special Fidelity package that includes 30 days of free
Internet access. EarthLink is North America's #1 independent Internet
access provider.
(COMPUTER_GRAPHIC)
FIDELITY ON-LINE XPRESS+(registered trademark)
Fidelity On-line Xpress+ software for Windows combines comprehensive
portfolio management capabilities, securities trading and access to
research and analysis tools . . . all on your desktop. Call Fidelity
at 1-800-544-7272 or visit our Web site for more information on how to
manage your investments via your PC.
* WHEN YOU CALL THE QUOTES LINE, PLEASE REMEMBER THAT A FUND'S YIELD
AND RETURN WILL VARY AND,
EXCEPT FOR MONEY MARKET FUNDS, SHARE PRICE WILL ALSO VARY. THIS MEANS
THAT YOU MAY HAVE A
GAIN OR LOSS WHEN YOU SELL YOUR SHARES. THERE IS NO ASSURANCE THAT
MONEY MARKET FUNDS WILL BE
ABLE TO MAINTAIN A STABLE $1 SHARE PRICE; AN INVESTMENT IN A MONEY
MARKET FUND IS NOT INSURED
OR GUARANTEED BY THE U.S. GOVERNMENT. TOTAL RETURNS ARE HISTORICAL AND
INCLUDE CHANGES IN SHARE
PRICE, REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS, AND THE EFFECTS OF
ANY SALES CHARGES.
TO VISIT FIDELITY
For directions and hours,
please call 1-800-544-9797.
ARIZONA
7373 N. Scottsdale Road
Scottsdale, AZ
CALIFORNIA
815 East Birch Street
Brea, CA
851 East Hamilton Avenue
Campbell, CA
527 North Brand Boulevard
Glendale, CA
19200 Von Karman Avenue
Irvine, CA
10100 Santa Monica Blvd.
Los Angeles, CA
251 University Avenue
Palo Alto, CA
1760 Challenge Way
Sacramento, CA
7676 Hazard Center Drive
San Diego, CA
455 Market Street
San Francisco, CA
950 Northgate Drive
San Rafael, CA
1400 Civic Drive
Walnut Creek, CA
6300 Canoga Avenue
Woodland Hills, CA
COLORADO
1625 Broadway
Denver, CO
CONNECTICUT
48 West Putnam Avenue
Greenwich, CT
265 Church Street
New Haven, CT
300 Atlantic Street
Stamford, CT
29 South Main Street
West Hartford, CT
DELAWARE
222 Delaware Avenue
Wilmington, DE
FLORIDA
4400 N. Federal Highway
Boca Raton, FL
90 Alhambra Plaza
Coral Gables, FL
4090 N. Ocean Boulevard
Ft. Lauderdale, FL
1907 West State Road 434
Longwood, FL
8880 Tamiami Trail, North
Naples, FL
2401 PGA Boulevard
Palm Beach Gardens, FL
8065 Beneva Road
Sarasota, FL
1502 N. Westshore Blvd.
Tampa, FL
GEORGIA
3445 Peachtree Road, N.E.
Atlanta, GA
1000 Abernathy Road
Atlanta, GA
ILLINOIS
One North Franklin Street
Chicago, IL
1415 West 22nd Street
Oak Brook, IL
1700 East Golf Road
Schaumburg, IL
3232 Lake Avenue
Wilmette, IL
INDIANA
4729 East 82nd Street
Indianapolis, IN
MAINE
3 Canal Plaza
Portland, ME
MARYLAND
7401 Wisconsin Avenue
Bethesda, MD
1 West Pennsylvania Ave.
Towson, MD
MASSACHUSETTS
470 Boylston Street
Boston, MA
155 Congress Street
Boston, MA
25 State Street
Boston, MA
300 Granite Street
Braintree, MA
44 Mall Road
Burlington, MA
416 Belmont Street
Worcester, MA
MICHIGAN
280 North Woodward Ave.
Birmingham, MI
29155 Northwestern Hwy.
Southfield, MI
MINNESOTA
7600 France Avenue South
Edina, MN
MISSOURI
700 West 47th Street
Kansas City, MO
8885 Ladue Road
Ladue, MO
200 North Broadway
St. Louis, MO
NEW JERSEY
150 Essex Street
Millburn, NJ
56 South Street
Morristown, NJ
501 Route 17, South
Paramus, NJ
NEW YORK
1055 Franklin Avenue
Garden City, NY
999 Walt Whitman Road
Melville, L.I., NY
1271 Avenue of the Americas
New York, NY
71 Broadway
New York, NY
350 Park Avenue
New York, NY
NORTH CAROLINA
4611 Sharon Road
Charlotte, NC
OHIO
600 Vine Street
Cincinnati, OH
28699 Chagrin Boulevard
Woodmere Village, OH
OREGON
16850 SW 72 Avenue
Tigard, OR
PENNSYLVANIA
1735 Market Street
Philadelphia, PA
439 Fifth Avenue
Pittsburgh, PA
TENNESSEE
6150 Poplar Road
Memphis, TN
TEXAS
10000 Research Boulevard
Austin, TX
4017 Northwest Parkway
Dallas, TX
1155 Dairy Ashford Street
Houston, TX
2701 Drexel Drive
Houston, TX
400 East Las Colinas Blvd.
Irving, TX
14100 San Pedro
San Antonio, TX
19740 IH 45 North
Spring, TX
UTAH
215 South State Street
Salt Lake City, UT
VIRGINIA
8180 Greensboro Drive
McLean, VA
WASHINGTON
411 108th Avenue, N.E.
Bellevue, WA
511 Pine Street
Seattle, WA
WASHINGTON, DC
1900 K Street, N.W.
Washington, DC
WISCONSIN
595 North Barker Road
Brookfield, WI
TO WRITE FIDELITY
If more than one address is listed, please locate the address that is
closest to you. We'll give your correspondence immediate attention and
send you written confirmation upon completion of your request.
(LETTER_GRAPHIC)MAKING CHANGES
TO YOUR ACCOUNT
(such as changing name, address, bank, etc.)
Fidelity Investments
P.O. Box 770001
Cincinnati, OH 45277-0002
(LETTER_GRAPHIC)FOR NON-RETIREMENT
ACCOUNTS
BUYING SHARES
Fidelity Investments
P.O. Box 770001
Cincinnati, OH 45277-0003
OVERNIGHT EXPRESS
Fidelity Investments
2300 Litton Lane - KH1A
Hebron, KY 41048
SELLING SHARES
Fidelity Investments
P.O. Box 660602
Dallas, TX 75266-0602
OVERNIGHT EXPRESS
Fidelity Investments
Attn: Redemptions - CP6I
400 East Las Colinas Blvd.
Irving, TX 75039-5517
GENERAL CORRESPONDENCE
Fidelity Investments
P.O. Box 500
Merrimack, NH 03054-0500
(LETTER_GRAPHIC)FOR RETIREMENT
ACCOUNTS
BUYING SHARES
Fidelity Investments
P.O. Box 770001
Cincinnati, OH 45277-0003
SELLING SHARES
Fidelity Investments
P.O. Box 660602
Dallas, TX 75266-0602
OVERNIGHT EXPRESS
Fidelity Investments
Attn: Redemptions - CP6R
400 East Las Colinas Blvd.
Irving, TX 75039-5517
GENERAL CORRESPONDENCE
Fidelity Investments
P.O. Box 500
Merrimack, NH 03054-0500
INVESTMENT ADVISER
Fidelity Management & Research Company
Boston, MA
INVESTMENT SUB-ADVISERS
Fidelity Management & Research
(U.K.) Inc., London, England
Fidelity Management & Research
(Far East) Inc., Tokyo, Japan
Fidelity Investments
Money Management, Inc.
Merrimack, NH
OFFICERS
Edward C. Johnson 3d, President
Robert C. Pozen, Senior Vice President
Fred L. Henning Jr., Vice President
Dwight D. Churchill, Vice President
Andrew J. Dudley, Vice President,
Intermediate Government Income
Thomas J. Silvia, Vice President,
Ginnie Mae and Government Income
Stanley N. Griffith, Assistant
Vice President
Eric D. Roiter, Secretary
Richard A. Silver, Treasurer
Matthew N. Karstetter, Deputy Treasurer
John H. Costello, Assistant Treasurer
Leonard M. Rush, Assistant Treasurer
Thomas J. Simpson, Assistant Treasurer
BOARD OF TRUSTEES
Ralph F. Cox *
Phyllis Burke Davis *
Robert M. Gates *
Edward C. Johnson 3d
E. Bradley Jones *
Donald J. Kirk *
Peter S. Lynch
Marvin L. Mann *
William O. McCoy *
Gerald C. McDonough *
Robert C. Pozen
Thomas R. Williams *
ADVISORY BOARD
J. Gary Burkhead
Abigail P. Johnson
* INDEPENDENT TRUSTEES
GVT-ANN-0999 83806
1.537760.102
GENERAL DISTRIBUTOR
Fidelity Distributors Corporation
Boston, MA
TRANSFER AND SHAREHOLDER
SERVICING AGENT
Fidelity Service Company, Inc.
Boston, MA
CUSTODIAN
The Bank of New York
New York, NY
FIDELITY'S TAXABLE BOND FUNDS
Capital & Income
Ginnie Mae
Government Income
High Income
Intermediate Bond
Intermediate Government Income
International Bond
Investment Grade Bond
New Markets Income
Short-Term Bond
Spartan(registered trademark) Government Income
Spartan Investment Grade Bond
Strategic Income
Target TimelineSM 1999, 2001 & 2003
THE FIDELITY TELEPHONE CONNECTION
MUTUAL FUND 24-HOUR SERVICE
Exchanges/Redemptions 1-800-544-7777
Account Assistance 1-800-544-6666
Product Information 1-800-544-8888
Retirement Accounts 1-800-544-4774
(8 a.m. - 9 p.m.)
TDD Service 1-800-544-0118
for the deaf and hearing impaired
(9 a.m. - 9 p.m. Eastern time)
Fidelity Automated Service
Telephone (FASTSM) 1-800-544-5555
AUTOMATED LINE FOR QUICKEST SERVICE
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Corporate Headquarters
82 Devonshire St., Boston, MA 02109
www.fidelity.com
