Investing in Investment Grade Bonds
An investment grade, or “investment grade,” is a rating given to securities. These securities are considered high-quality if they have strong economic fundamentals and are not subject to market risk. Investment grade securities are backed by the government, but can also be purchased privately. Investment grade bonds are considered safe and stable, and are a good choice for core fixed income allocations. These bonds offer steady returns through an economic cycle. However, there are several factors that affect an investment grade’s rating.
The investment grade rating is an important factor to consider when choosing the best investment for your portfolio. For example, investment grade bonds are rated BBB or higher by Moody’s or Fitch. Investment grade bonds have low default rates compared to other bonds, and investors are generally willing to accept lower yields in return for a higher level of safety. These investments are also less volatile than non-investment grade bonds. Investing in investment grade bonds will help you make a more informed decision about your money.
While investing in investment grade bonds requires a high level of expertise, the risk of default is generally low. However, a high-risk investment grade bond may have a false credit rating, meaning that it failed to meet its cash flow projections. This happened during the 2007-2008 recession. In some cases, an investment grade rating can drop suddenly and may not be redeemed for several years, making it difficult for investors to find a buyer.
Despite high yields, high risk bonds come with increased risks. While they might entice investors with their high yields, they should be viewed as a supplemental part of a diversified portfolio, and only be bought when you have other investments that offer higher yields. A strong understanding of the risks associated with investment grade and sub-investment grade bonds is essential to choosing the best fixed income investments. However, this does not mean that investing in high yield bonds is a good idea.
Although investment grade bonds do not usually default, they do carry a risk of credit risk. The yield to maturity (YTM) of an investment grade bond is usually higher than the yield of a high yield bond. As a result, investors should consider the risk when deciding which bond to invest in. When evaluating a potential investment, the best way to assess the risk is by looking at the company’s credit ratings. These ratings can tell you whether a bond is investment grade or not.
The difference between investment grade bonds is significant. The former are considered low-risk investments that are more likely to meet their payment obligations. By contrast, high-risk bonds carry higher credit risk. These securities are also referred to as junk bonds, high-yield bonds, or speculative grade securities. The S&P Global 2018 Annual Global Corporate Default and Rating Transition Study provides a helpful overview of investment grade and high-yield bonds.