Fidelity Government Income Fund

PORTFOLIO MANAGER Q&A | AS OF FEBRUARY 28, 2023

Fidelity? Government Income Fund

Key Takeaways

? For the semiannual reporting period ending February 28, 2023, the

fund's Retail Class shares had a return of -2.89%, roughly in line, net of fees, with the -2.57% result of the Bloomberg 75% US Government/25% U.S. Mortgage-Backed Securities Blended Index. The fund also performed roughly in line with the -2.61% result of the broad-based Bloomberg US Government Bond Index, and outpaced the Lipper peer group average.

? The past six months, Co-Managers Franco Castagliuolo and Sean

Corcoran attempted to exploit market inefficiencies and identify attractively priced securities, in accordance with their longer-term investment strategy.

? According to Franco, government securities' negative result this

period stemmed primarily from rising inflation and interest rate hikes, both early and late in the period.

? Timely purchases and sales of MBS helped the fund's performance

versus the Bloomberg blended index.

? In contrast, the fund's yield-curve positioning, led by exposure to

short-term securities, detracted from the fund's relative performance for the six months.

? As of February 28, Franco and Sean believe that inflation is quickly

slowing, and that economic activity will follow suit in 2023. Furthermore, they believe these conditions might mean a period of relative calm for government bonds.

? Looking ahead, Franco and Sean believe agency MBS offer the

potential for outperformance, given that the bonds offer attractive valuations and attractive spreads relative to U.S. Treasuries.

Not FDIC Insured ? May Lose Value ? No Bank Guarantee

MARKET RECAP

U.S. taxable investment-grade bonds returned -2.13% for the six months ending February 28, 2023, according to the Bloomberg U.S. Aggregate Bond Index. The new year began with an upturn in January (+3.08%) but in February bonds fell back (-2.59%), as the backdrop remained clouded by the multitude of risk factors that challenged the global economy in 2022, when the index logged its worst annual return on record. Persistently high inflation prompted the Federal Reserve to continue tightening monetary policy, and market interest rates eclipsed their highest level in a decade. Since March 2022, the Fed has hiked its benchmark rate eight times, by 4.5 percentage points, while also shrinking its massive asset portfolio. These actions helped push nominal and real (inflation-adjusted) U.S. bond yields to their highest level in more than a decade, while sending bond prices, which move inversely to yields, downward and credit spreads wider. In November, however, the bond market staged a broad rally (+3.68%) when comments by Fed Chair Jerome Powell pointed to a slowdown in the pace of rate hikes, and in December the Fed stepped down to a 0.50% rise after a series of 0.75% hikes, followed by a 0.25% rise on February 2. Yields stabilized and credit spreads tightened amid this improved risk sentiment, which helped higher-risk assets outperform Treasuries for the six months, reversing the trend from earlier in 2022. Still, all major market segments lost ground for the period, with shorterterm bonds holding up best.

PORTFOLIO MANAGER Q&A | AS OF FEBRUARY 28, 2023

Q&A

Franco Castagliuolo Co-Manager

Fund Facts

Trading Symbol: Start Date: Size (in millions):

Sean Corcoran Co-Manager

FGOVX April 04, 1979 $3,449.94

Investment Approach

? Fidelity? Government Income Fund provides investors exposure to the government and government-related sectors of the U.S. bond market. The strategy may invest in U.S. Treasuries, Treasury Inflation-Protected Securities, debt issued by government-related agencies (e.g., Fannie Mae, Freddie Mac), and mortgage-backed securities (MBS) issued by Fannie Mae, Freddie Mac and Ginnie Mae.

? Benchmarked against the Bloomberg 75% U.S. Government/25% U.S. MBS Blended Index, the fund seeks to deliver competitive, risk-adjusted performance commensurate with investor expectations of a core government bond fund.

? Utilizing a team-based investment process, the fund relies on experienced portfolio managers, research analysts and traders. We concentrate on areas where we believe we can repeatedly add value, including asset allocation, sector and security selection, yield-curve positioning and opportunistic trading.

? Robust governance and risk management support the identification of both opportunities and risks.

An interview with Co-Managers Franco Castagliuolo and Sean Corcoran

Q: Franco, how did the fund perform for the six months ending February 28, 2022

F.C. The fund's Retail Class shares returned -2.89%, roughly in line, net of fees, with the -2.57% result of the Bloomberg 75% US Government/25% U.S. Mortgage-Backed Securities Blended Index. The fund also performed roughly in line with the -2.61% result of the broad-based Bloomberg US Government Bond Index, and outpaced the Lipper peer group average.

Looking a bit longer term, the fund returned -10.30% for the trailing 12 months, lagging both Bloomberg indexes and outpacing the Lipper peer group average.

Q: What shaped the environment for government securities the past six months

F.C. U.S. government bonds, like most bonds, declined for the period amid high volatility caused by constantly shifting inflation and higher interest rates. Bonds struggled at the outset last September when the Federal Reserve, as part of its ongoing anti-inflation campaign, raised its policy rate another 75 basis points (0.75 percentage points), after lifting it by 225 basis points from March through August. The Fed also signaled it planned to continue raising rates until inflation was firmly under control. Investors pushed bond yields higher and prices, which move inversely to yields, lower. October saw a further, albeit smaller, jump in yields, when inflation indicators, which had retrenched in September, reversed course.

But bonds rallied from November through January. Yields held more steady, even as the Fed continued to raise its policy rate ? although in December it moderated the size of its hike. Inflation decelerated to about 7% year-over-year after hitting a midyear, multi-decade peak of about 9%. By the end of January, the bond market had priced in a Fed pivot, meaning it expected the central bank to stop raising rates by mid-2023 and begin to cut them in the second half of the year. In February, however, hopes for a quicker end to the Fed's rate-tightening cycle dimmed when fresh data showed inflation still running at about 6%. This prompted renewed worries about further rate hikes and underpinned rising bond yields and falling prices.

Despite this heightened market volatility, Sean and I, along with our team of traders and analysts, continued to remain

2 | For definitions, fund risks and other important information, please see the Definitions and Important Information section of this Q&A.

PORTFOLIO MANAGER Q&A | AS OF FEBRUARY 28, 2023

focused on generating competitive risk-adjusted performance commensurate with expectations of a government bond-focused fund. We attempted to exploit market inefficiencies based on our top-down research on the global economy, government policy, and supply and demand in the market. We aimed to find mispriced securities by relying on proprietary models to forecast the timing of cash flow. We're satisfied that this strategy proved its merits and helped us keep pace with the blended index, even though the absolute return of the market and the fund disappointed.

Q: Sean, what notably helped

S.C. Our approach to mortgage-backed securities was the primary contributor to the fund's relative result. MBS have a high duration (a measure of sensitivity to interest rates) and, like other longer-term bonds, experienced an acute decline last fall when yields were rising.

Beyond higher rates, MBS were hindered as the Fed shrunk its massive balance sheet, a process called quantitative tightening, by letting some of its MBS and Treasury holdings roll off each month as the debt matured. That sparked investor concern about who might step in to replace the Fed, once the biggest buyer of MBS. This pushed MBS prices to levels we felt were quite attractively valued, compared with U.S. Treasuries, and as close to the cheapest they'd been since the 2008 financial crisis (excluding March 2020), by some measures. The spread, or difference in yield, between the two segments widened significantly, meaning that to compensate investors for added prepayment risk, MBS offered additional yield over Treasuries.

We opportunistically increased the fund's exposure to MBS the past six months, beginning with a notable overweight in the segment at the end of October. We added government agency mortgage securities from Fannie Mae and Freddie Mac, often those made up of 15- and 20-year mortgages that offered a particularly attractive valuation, in our view. We also bought some commercial mortgage backed securities, which are backed by multifamily loans and insured by Fannie Mae or Freddie Mac.

From that point through mid-January, this strategy contributed to both our absolute and relative performance, as MBS outpaced the blended index. Homeowners became less and less likely to refinance their mortgage, given the steep climb in interest rates. That meant that prepayment risk ? a reason why MBS typically yield more than U.S. Treasuries ? became more predictable. With less uncertainty about prepayment, along with an improved outlook for inflation and interest rates that boosted the entire bond market, MBS rallied strongly.

By mid-January, the spread between Treasuries and MBS had shrunk, suggesting to us that MBS had reached their full value. So we reduced the fund's overweight in MBS, another

move that modestly boosted relative performance, given that interest rates and bond yields scaled higher, and MBS underperformed, toward period end.

Q: How about noteworthy detractors

S.C. Yield-curve positioning, meaning how we spread investments over bonds with various interest rate sensitivity and yields, hurt most this period. We positioned the fund with an overweight in short-term securities because we believed their yields would rise less than was priced into the market, despite additional Fed hikes. Instead, investors became more worried about the Fed's reaction to near-term inflation, leading to an inverted yield curve. By that I mean that yields at the short end of the Treasury curve were higher than those for longer-dated maturities, as opposed to a normal, upward-sloping curve where longer-dated bonds yield more than shorter-dated bonds. Against that backdrop, an overweight in shorter-term securities detracted from the fund's relative result.

Q: Gentlemen, what's your outlook for the government bond market as of February 28

F.C. While the Fed continues to fight inflation by raising rates and withdrawing liquidity, we think that real-time inflation has already slowed and credit conditions are becoming unsustainably tight. This should lead to slower economic growth, or outright contraction, and lower interest rates.

Although we have little doubt the Fed will continue to raise interest rates in the next several months, we believe the central bank will become increasingly more cautious with the pace and size of rate hikes, in response to data suggesting that key measures of the economy are already softening and inflationary pressure is waning. Against this backdrop, the government bond market could enter a state of relative calm if investors perceive the Fed is poised to slow the pace of, or ultimately cease, rate hikes.

S.C. We still see value among mortgage-backed securities, which we view as attractive relative to U.S. Treasuries. We believe government agency-backed MBS stand to benefit from their safe-haven status, should investors begin to worry about riskier asset classes if the economy slows.

Looking ahead, we plan to continue to work with our experienced team to find attractively priced bonds for the portfolio while maintaining a disciplined approach to risk management. Franco and I have seen many types of market conditions in our combined 40-plus years in the bond market. We believe our active-management approach is wellsuited for the investing environment we see at period end, and that the expertise of Fidelity's research and trading teams provides us with an advantage over index-based strategies. In the longer term, we remain firm believers in government securities as an important component of a fixedincome portfolio.

3 | For definitions, fund risks and other important information, please see the Definitions and Important Information section of this Q&A.

PORTFOLIO MANAGER Q&A | AS OF FEBRUARY 28, 2023

The co-managers on supply-anddemand trends in the MBS market:

F.C. "In addition to the direction of interest rates, supply and demand are likely to impact the valuations of mortgage securities in coming months. "As of February 28, the supply of mortgages that ultimately make up MBS pools has shrunk considerably, as rising mortgage rates and falling home prices kept a lid on home-loan refinancing and purchases of new homes. Net supply in some corners of the mortgage market, such as 15-year MBS, could easily be negative. We consider this a positive technical factor that could support MBS in the near term." S.C. "Investor demand for MBS is more of a question mark. On the one hand, the U.S. Federal Reserve is by far the biggest owner in the U.S. MBS market, holding roughly one-third of outstanding government-agency-backed MBS. The central bank implemented a plan to reduce its balance sheet, allowing up to $35 billion of MBS per month to mature, without reinvesting the proceeds back into the market. "We believe the Fed's holdings will be reduced at a slower pace, most likely in the range of $15 billion to $20 billion per month in the immediate term. "An equally important question is whether the Fed will actually sell the MBS it holds on its balance sheet. We think that Fed will view the amount of financial tightening in the housing market as sufficient to reduce its inflationary effects on the economy and, therefore, will refrain from outright sales of its MBS holdings for the time being. "Elsewhere, more-predictable MBS prepayment activity may prompt investors to look toward the sector. We think prepayment risk will continue to remain low in the near term, given that home-loan refinancing and loan origination have declined as borrowing rates have remained well above the level of most existing mortgages. More clarity around prepayments could, in turn, mean more investors turn to MBS."

4 | For definitions, fund risks and other important information, please see the Definitions and Important Information section of this Q&A.

PORTFOLIO MANAGER Q&A | AS OF FEBRUARY 28, 2023

COUPON DISTRIBUTION

Coupon < 1.0% >= 1.0% < 2.0% >= 2.0% < 3.0% >= 3.0% < 4.0% >= 4.0% < 5.0% >=5.0% < 6.0% >= 6.0% < 7.0% >= 7.0% < 8.0% >= 8.0% < 9.0% >= 9.0% < 10.0% >= 10.0% < 11.0% >= 11.0% Other Debt Securities

Portfolio Weight 11.34% 15.01% 35.67% 18.50% 12.84% 6.35% 0.29% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

WEIGHTED AVERAGE MATURITY

Six Months Ago

Years

7.3

7.1

This is a weighted average of all maturities held in the fund.

DURATION

Years

Six Months Ago

6.1

6.2

Portfolio Weight Six Months Ago 15.20% 16.88% 41.92% 15.60% 7.53% 2.70% 0.17% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

5 | For definitions, fund risks and other important information, please see the Definitions and Important Information section of this Q&A.

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