ANCHOR (OFF-CAMERA) ENGLISH SAYING:

Now, how do you see sequestration as a concern and how do you manage your fund with some of those concerns top of mind?

FRANCO CASTAGLIUOLO, LEAD MANAGER, FIDELITY INTERMEDIATE GOVERNMENT INCOME FUND, (ENGLISH) SAYING:

Sure, well, I mean the economy definitely has some bright spots right now that we're focusing on. Payroll growth has been strong over the last several months. The housing market is starting to recover. It's creating higher household net worth and it's picking up residential construction. But there are some headwinds that are pushing against those tailwinds, primarily the fiscal consolidation that's in order for this year. So the sequestration cuts, we think are going to be worth about 60 basis points drag on growth this year. And all the tax increases that came along the way - the payroll tax cut increase of 2%, the higher marginal tax bracket of 39.6% - that's probably worth another percent. So while there are some bright spots in the economy, there's about 1.5% drag that we'll likely to see this year from fiscal consolidation. And so that's likely to keep overall GDP this year not that much better than the last few years - maybe somewhere in the mid-2%s - but not enough to take the Fed out of the equation. We think the Fed is likely to stay involved in the fixed income markets. Maybe they taper off purchases well much later in the process, maybe towards the end of the year if growth really picks up. But we think sort of in the near term, until we see what the full effects of sequestration cuts are going to be, growth is likely to be stable and the Fed's likely to stay in play.

ANCHOR (OFF-CAMERA) ENGLISH SAYING:

Franco, does that mean any worries out there about a bond bubble are overdone?

FRANCO CASTAGLIUOLO, LEAD MANAGER, FIDELITY INTERMEDIATE GOVERNMENT INCOME FUND, (ENGLISH) SAYING:

You know, the idea of a bond bubble is - it's tricky. I mean there are reasons for rates to be where they are. This is what the Fed has been, it's sort of been one of the Fed's main talking points. It takes a long time to recover from the type of financial crisis that we saw in this country. Growth has been really just sort of moderate. There hasn't been a real breakout in growth. And the Fed obviously is in play and that's kept rates subdued. But you know to really get a sharp higher move in rates like what we saw in 1994 maybe, you really need to see a significant pickup in the labor market, and really with the idea of fiscal government starting a consolidation process, that's hard to imagine right now.

ANCHOR (OFF-CAMERA) ENGLISH SAYING:

Franco, I want to talk about your fund itself. You're obviously beating your peers. You're beating your benchmark. You hold a lot of mortgage debt. Recently, you had about 17% of your holdings in CMOs, another 14% in MBS pass-throughs. Do you expect to add to those holdings this year? And how are those securities helping your fund outperform?

FRANCO CASTAGLIUOLO, LEAD MANAGER, FIDELITY INTERMEDIATE GOVERNMENT INCOME FUND, (ENGLISH) SAYING:

Sure. Well, we're at the higher end of our historical weightings in MBS for a number of reasons. They've really been a terrific alternative to holding traditional Treasuries. In the case of Fannie and Freddie, they're near Treasury quality. They have a strong implicit backing of the US government. They've been receiving financial support for several years from the government. And in the case of Ginnie Mae, they're explicitly guaranteed by the government. The trick with MBS is they offer, they can offer additional, in some cases, significant additional yield above and beyond traditional Treasuries because they come with an additional risk over Treasuries which is prepayment risk. Most of the sector trades well above par and the securities are pre-payable at anytime from the underlying borrowers. So it really takes a careful eye and a dedicated research process to be able to pick through the millions of securities that this sector offers and look for bonds that have alpha potential above Treasuries. And we feel like we do that really well here. On top of that, this sector has benefitted from the Fed's support. So they've been using mortgages as part of their quantitative easing program for several years now. They're still using them and we expect that to continue for the medium term.

ANCHOR (OFF-CAMERA) ENGLISH SAYING:

Franco, in terms of your actual US Treasury holdings, every bond investor wants to know how to play the curve. They're trying to squeeze a little bit of return out of Treasuries which is hard to do. So where do you find the most value on the curve? How do you handle that?

FRANCO CASTAGLIUOLO, LEAD MANAGER, FIDELITY INTERMEDIATE GOVERNMENT INCOME FUND, (ENGLISH) SAYING:

You know the way we've handled duration and curve management in this fund, it's been- there are two core principles we've used. First is that we've started- we tried to have a truth in advertising approach with this fund. Our clients are buying a fund that's benchmarked versus the 1- to 10-year part of the Treasury curve. They're expected to get exposure to that part of the curve. So we've been very careful not to get significantly away from the broader market exposure and kept our duration roughly in line in the index, and kept our curve positioning roughly in line with the index for that matter. And secondly, as I already alluded to, there really hasn't been a reason to get wildly different positioning than the market in terms of duration because of the state of the economy and what we thought was likely coming out of the Fed. Rates were likely- you know, coming out of the fiscal crisis, rates were likely stay low and range-bound, and they have. And the Fed was likely to continue to support the Treasury and mortgage markets.