Fixed income investment grade - join
Basics on Fixed-Income Funds
Fixed-income mutual funds are an excellent diversification tool for investors’ portfolios. And as the name suggests, they can be used for generating income. But what are fixed-income funds?
Commonly called bond funds, fixed-income funds are simply mutual funds that own fixed-income securities such as US Treasuries, corporate bonds, municipal bonds, etc. These fixed-income funds come in many shapes and styles. Let’s start with five basic types of fixed-income funds.
Key Takeaways
- Fixed-income funds are simply mutual funds that own fixed-income securities. They can be an excellent diversification tool for your portfolio.
- Fixed-income funds are also sometimes called bond funds, and they can be used to generate income.
- There are five basic types: Treasury-Inflation Protected Securities (TIPS), municipal, corporate, high-yield, and international.
Treasury-Inflation Protected Securities (TIPS) Fixed-Income Funds
TIPS are bonds issued by the US Treasury that pay a coupon on the adjusted principal of the bond. The bond is adjusted on a semi-annual basis with the rate of the Consumer Price Index (a measure of inflation). So, TIPS are said to keep pace with inflation by returning the adjusted principal upon maturity and coupon payments along the way. There are pros and cons of TIPS mutual funds.
Here a few of the best TIPS fixed-income funds:
Municipal Fixed-Income Funds
Municipal fixed-income funds hold bonds that are issued by municipalities such as cities and states. Municipal bonds generally receive favorable tax treatment. The interest on most municipal bonds is tax-free at the federal level and is tax-free for investors who buy municipal bonds that are issued within their state of residence. There are also private-activity municipal bonds.
Investors that live in California, Massachusetts, New York, and several other states, have many options to invest in double tax-free municipal bond mutual funds (Federally and state tax-free). Other investors will find national municipal bond mutual funds to be of value.
Generally, except for extreme circumstances, municipal bonds have a lower yield than taxable bonds of similar credit quality, making it necessary to understand tax-equivalent yields.
These are a few of the best municipal fixed-income funds:
Investment Grade Corporate Fixed-Income Funds
Investment grade corporate bonds are issued by high-quality corporations in order to raise capital for the corporation. These bonds are typically rated BBB and above by S&P or Baa and above by Moody's. Investment grade corporate fixed-income funds allow investors to gain access to a diversified basket of corporate bonds, reducing risk (credit risk, interest rate risk and reinvestment risk).
Many mutual fund companies offer investment grade corporate fixed-income funds with various durations and maturities. Several Vanguard bond funds are listed below:
High-Yield Fixed-Income Funds
High-yield bonds are often referred to as “junk bonds” due to their low credit ratings. These bonds are issued by corporations and are rated below BBB by S&P and/or below Baa by Moody’s. High-yield bonds typically have higher yields than investment grade corporate bonds due to the additional credit risk that is taken by the buyer of the bonds. So, remember, high yield comes with higher yields but higher risk.
A couple of the best high-yield fixed-income funds:
International Fixed-Income Funds
Just like it sounds, international bond mutual funds invest in bonds issued by foreign entities. Investors can take advantage of a depreciating US dollar by purchasing an unhedged international bond mutual fund. All else being equal (bond yield and bond price), if you own a foreign bond and the US dollar loses ground to that foreign bond’s currency, you will gain/lose based on the foreign currency’s appreciation/depreciation. There are also bond mutual funds that practice currency hedging - in order to avoid the inherent volatility of currency prices.
Keep in mind: Before you invest in a fixed-income fund there are a few items to consider. As a first step, consider reading "Before You Invest in a Bond Mutual Fund."
U.S. Investment Grade Corporate Strategy
To determine the optimal beta positioning of the portfolio, the process begins with a top-down value assessment of the corporate bond universe, including a consideration of macroeconomic conditions, the corporate earnings environment and relative valuations. The team examines swap spreads as a proxy for the liquidity premium embedded within corporate spreads, and assesses factors such as leverage and asset volatility (which drive both equity volatility and default spreads) as an indicator of future default expectations.
The team uses quantitative tools and signals to complement their fundamental research and enhance their process. An example of this is the use of Moody’s Credit Edge, an industry leading Merton-based structural model. The output offers the ability to to screen and compare credits, model events and monitor portfolio risk.
The team focuses on financial risk, business risk and management ability/intentions. When analyzing business risk, the team assesses a company’s competitive position, its diversification and growth potential, the value of its franchise, and the flexibility of its business model in terms of the variability of its cost structure. Financial risk involves an examination of a company’s financial statements to assess the suitability of the company’s capital structure for the risk entailed in its business. The group also seeks to understand management’s intentions, in terms of business development and capital structure, and ability to execute.
The team’s credit analysis narrows the universe to approximately to investment candidates on which a relative valuation assessment is conducted. The team derives a "fair value" spread for each bond that is compared to the market spread to determine a bond’s under- or over-valuation.
A portfolio of to issuers is constructed, with sector allocation driven primarily from bottom-up security selection (subject to risk management guidelines). Integral to the team’s portfolio construction process is the measurement and monitoring of market risk, duration and volatility, and credit risk through the use of proprietary risk measures (i.e., Distance to Default) and proprietary models. The team actively manages spread duration with a target range of +/- two years versus the benchmark, with portfolio duration targeted at +/- one year around the benchmark.
What Does Investment Grade Mean?
Credit ratings provide a useful measure for comparing fixed-income securities, such as bonds, bills, and notes. Most companies receive ratings according to their financial strengths, prospects, and past history. Companies that have manageable levels of debt, good earnings potential, and good debt-paying records will have good credit ratings.
Investment grade refers to the quality of a company's credit. To be considered an investment grade issue, the company must be rated at 'BBB' or higher by Standard and Poor's or Moody's. Anything below this 'BBB' rating is considered non-investment grade. If the company or bond is rated 'BB' or lower it is known as junk grade, in which case the probability that the company will repay its issued debt is deemed to be speculative.
Key Takeaways
- Credit ratings provide a useful measure for comparing fixed-income securities, such as bonds, bills, and notes.
- Any purchase or sale of bonds, bills or notes, will have an associated credit rating.
- In finance, government and private fixed income securities, such as bonds and notes, are considered investment grade if they have a low risk of default.
Any purchase or sale of bonds, bills or notes, will have an associated credit rating. This rating changes over time as the company's strength and debt load changes. If a company takes on more debt than it can handle or if its earnings outlook weakens, it will lower the company's rating. If it reduces its debt or finds a way to increase potential earnings, the company's rating will usually increase.
Which Securities Are Considered Investment Grade?
In finance, government and private fixed income securities, such as bonds and notes, are considered investment grade if they have a low risk of default. Investment grade is determined based on a relative scale by credit rating agencies such as Standard & Poor's and Moody's. Such credit ratings express the ability and willingness of a borrowing organization to repay its debt and are based on many financial and economic indicators that influence the borrower's creditworthiness. Securities with a rating of BBB or above from Standard and Poor's or Baa3 or above from Moody's are considered investment grade.
Credit Ratings and Creditworthiness
Credit ratings represent forward-looking statements about the creditworthiness and credit risk of a particular organization in meeting its financial obligations. The credit ratings indicate a default risk for an individual debt, a municipal bond, a government bond or mortgage-backed securities (MBS).
When constructing its rating, the credit rating agency takes into account a myriad of factors to come up with a well-balanced view of credit risk. Leverage, cash flows, earnings, interest coverage ratio, and other financial ratios are common indicators that the credit rating agency considers to assign an investment grade to a specific security.
A security has an investment grade rating if it has a rating that falls within the range of Aaa to Baa3 from Moody's or AAA to BBB- for Standard & Poor's. The company's securities have investment grade ratings if it has a strong capacity to meet its financial commitments.
The rating of BBB- from Standard & Poor's and Baa3 from Moody's represents the lowest possible ratings for a security to be considered investment grade. BBB- and Baa3 ratings indicate that the company that issued such securities has an adequate capacity to meet its obligations, but it can be subject to adverse economic conditions and changes in financial circumstances.
The rating of BBB- from Standard & Poor's and Baa3 from Moody's represents the lowest possible ratings for a security to be considered investment grade.
Losing Investment Grade Ratings
It is common for a security to lose its investment grade rating. The reasons for such events vary and can be related to changes in the overall business environment such as recession, industry-specific problems or the company's financial problems.
You should take rankings from credit rating agencies with caution.
If there is a recession, it is likely that many companies are struggling to generate enough cash flow to cover their interest and principal repayments, and credit agencies can lower the rating of companies across sectors. A change in technology or the emergence of a rival within an industry can also warrant downgrades of securities rating from investment grade to speculative grade. Another common reason for the loss of a security's investment grade is due to the company's problems, such as taking too much leverage, problems with collecting on accounts receivable and regulatory changes.
You should take rankings from credit rating agencies with caution. During the financial crisis of , it became evident that credit rating agencies misled the public by giving AAA rating to the highly complex mortgage-backed securities market. It turned out that these MBS were high-risk investments and their ratings were soon downgraded to speculative grade from investment grade.
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The Fed hikes, Treasury yields rise
Performance: Bloomberg L.P.
Issuance: The Bond Buyer, 18 Mar
Fund flows: Lipper.
New deals: Market Insight, MMA Research, 16 Mar
Any reference to credit ratings refers to the highest rating given by one of the following national rating agencies: S&P, Moody’s or Fitch. Credit ratings are subject to change. AAA, AA, A and BBB are investment grade ratings; BB, B, CCC, CC, C and D are below-investment grade ratings.
Representative indexes: municipal: Bloomberg Municipal Index; high yield municipal: Bloomberg High Yield Municipal Index; short duration high yield municipal: S&P Short Duration Municipal Yield Index; taxable municipal: Bloomberg Taxable Municipal Bond Index; U.S. aggregate bond: Bloomberg U.S. Aggregate Bond Index; U.S. Treasury: Bloomberg U.S. Treasury Index; U.S. government related: Bloomberg U.S. Government-Related Index; U.S. corporate investment grade: Bloomberg U.S. Corporate Index; U.S. mortgage-backed securities; Bloomberg U.S. Mortgage-Backed Securities Index; U.S. commercial mortgage-backed securities: Bloomberg CMBS ERISA-Eligible Index; U.S. asset-backed securities: Bloomberg Asset-Backed Securities Index; preferred securities: ICE BofA U.S. All Capital Securities Index; high yield 2% issuer capped: Bloomberg High Yield 2% Issuer Capped Index; senior loans: Credit Suisse Leveraged Loan Index; global emerging markets: Bloomberg Emerging Market USD Aggregate Index; global aggregate: Bloomberg Global Aggregate Unhedged Index.
The views and opinions expressed are for informational and educational purposes only as of the date of production/writing and may change without notice at any time based on numerous factors, such as market or other conditions, legal and regulatory developments, additional risks and uncertainties and may not come to pass. This material may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections, forecasts, estimates of market returns, and proposed or expected portfolio composition. Any changes to assumptions that may have been made in preparing this material could have a material impact on the information presented herein by way of example. Past performance is no guarantee of future results. Investing involves risk; principal loss is possible.
All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such. For term definitions and index descriptions, please access the glossary on www.oldyorkcellars.com Please note, it is not possible to invest directly in an index.
A word on risk
Investing involves risk; principal loss is possible. Debt or fixed income securities are subject to market risk, credit risk, interest rate risk, call risk, derivatives risk, dollar roll transaction risk and income risk. As interest rates rise, bond prices fall. Below investment grade or high yield debt securities are subject to liquidity risk and heightened credit risk. Preferred securities are subordinated to bonds and other debt instruments in a company’s capital structure and therefore are subject to greater credit risk. Foreign investments involve additional risks, including currency fluctuation, political and economic instability, lack of liquidity and differing legal and accounting standards. Asset-backed and mortgage-backed securities are subject to additional risks such as prepayment risk, liquidity risk, default risk and adverse economic developments. The value of convertible securities may decline in response to such factors as rising interest rates and fluctuations in the market price of the underlying securities. Senior loans are subject to loan settlement risk due to the lack of established settlement standards or remedies for failure to settle. These investments are subject to credit risk and potentially limited liquidity, as well as interest rate risk, currency risk, prepayment and extension risk, and inflation risk.
Investors should contact a tax advisor regarding the suitability of tax-exempt investments in their portfolio. If sold prior to maturity, municipal securities are subject to gain/losses based on the level of interest rates, market conditions and the credit quality of the issuer. Income may be subject to the alternative minimum tax (AMT) and/or state and local taxes, based on the state of residence. Income from municipal bonds held by a portfolio could be declared taxable because of unfavorable changes in tax laws, adverse interpretations by the Internal Revenue Service or state tax authorities, or noncompliant conduct of a bond issuer. It is important to review your investment objectives, risk tolerance and liquidity needs before choosing an investment style or manager.
Nuveen provides investment advisory solutions through its investment specialists.
What is fixed income investing?
The iShares Funds are not sponsored, endorsed, issued, sold or promoted by Barclays, Bloomberg Finance L.P., Cohen & Steers Capital Management, Inc., European Public Real Estate Association (“EPRA® ”), FTSE International Limited (“FTSE”), India Index Services & Products Limited, Interactive Data, JPMorgan Chase & Co., Japan Exchange Group, MSCI Inc., Markit Indices Limited, Morningstar, Inc., The NASDAQ OMX Group, Inc., National Association of Real Estate Investment Trusts (“NAREIT”), New York Stock Exchange, Inc., Russell or S&P Dow Jones Indices LLC. None of these companies make any representation regarding the advisability of investing in the Funds. BlackRock is not affiliated with the companies listed above.
Neither FTSE nor NAREIT makes any warranty regarding the FTSE NAREIT Equity REITS Index, FTSE NAREIT All Residential Capped Index or FTSE NAREIT All Mortgage Capped Index; all rights vest in NAREIT. Neither FTSE nor NAREIT makes any warranty regarding the FTSE EPRA/NAREIT Developed Real Estate ex-U.S. Index, FTSE EPRA/NAREIT Developed Europe Index or FTSE EPRA/NAREIT Global REIT Index; all rights vest in FTSE, NAREIT and EPRA.“FTSE®” is a trademark of London Stock Exchange Group companies and is used by FTSE under license.
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RISKS
- Fixed Income Securities Risk:
- Fixed income securities may carry one or more of the following risks: credit, interest rate (as interest rates rise bond prices usually fall), inflation and liquidity.
- Foreign and Emerging Market Securities Risk:
- Foreign and emerging market securities may be subject to greater political, economic, environmental, credit, currency and information risks. Foreign securities may be subject to higher volatility than US securities, due to varying degrees of regulation and limited liquidity. These risks are magnified in emerging markets.
- Currency Risk:
- Currency exchange rates between the US dollar and foreign currencies may cause the value of the fund's investments to decline.
- Below Investment Grade Securities Risk:
- Below investment grade fixed income securities may be subject to greater risks (including the risk of default) than other fixed income securities.
- Equity Securities Risk:
- Equity securities are volatile and can decline significantly in response to broad market and economic conditions.
Before investing, consider the fund's investment objectives, risks, charges, and expenses. You may obtain a prospectus or a summary prospectus containing this and other information. Read it carefully.
CFA® and Chartered Financial Analyst® are registered trademarks owned by the CFA Institute.
U.S. Investment Grade Corporate Strategy
To determine the optimal beta positioning of the portfolio, the process begins with a top-down value assessment of the corporate bond universe, including a consideration of macroeconomic conditions, the corporate earnings environment and relative valuations. The team examines swap spreads as a proxy for the liquidity premium embedded within corporate spreads, and assesses factors such as leverage and asset volatility (which drive both equity volatility and default spreads) as an indicator of future default expectations.
The team uses quantitative tools and signals to complement their fundamental research and enhance their process. An example of this is the use of Moody’s Credit Edge, an industry fixed income investment grade Merton-based structural model. The output offers the ability to to screen and compare credits, model events and monitor portfolio risk.
The team focuses on financial risk, business risk and management ability/intentions. When analyzing business risk, the team assesses a company’s competitive position, its diversification and growth potential, the value of its franchise, and the flexibility of its business model in terms of the variability of its cost structure. Financial risk involves an examination of a company’s financial statements to assess the suitability of the company’s capital structure for the risk entailed in its business. The group also seeks to understand management’s intentions, in terms of business development and capital structure, and ability to execute.
The team’s credit analysis narrows the universe to approximately to investment candidates on which a relative valuation assessment is conducted. The team derives a "fair value" spread for each bond that is compared to the market spread to determine a bond’s under- or over-valuation.
A portfolio of to issuers is constructed, with sector allocation driven primarily from bottom-up security selection (subject to risk management guidelines). Integral to the team’s portfolio construction process is apps to have when investing into bitcoin measurement and monitoring of market risk, duration and volatility, and credit risk through the use of proprietary risk measures (i.e., Distance to Default) and proprietary models. The team actively manages spread duration with a target range of +/- two years versus the benchmark, with portfolio duration targeted at +/- one year around the benchmark.
The Fed hikes, Treasury yields rise
Performance: Bloomberg L.P.
Issuance: The Bond Buyer, 18 Mar
Fund flows: Lipper.
New deals: Market Insight, MMA Research, fixed income investment grade Mar
Any reference to credit ratings refers to the highest rating given by one of the following national rating agencies: S&P, Moody’s or Fitch. Credit ratings are subject to change. AAA, AA, A and BBB are investment grade ratings; BB, B, CCC, CC, C and D are below-investment grade ratings.
Representative indexes: municipal: Bloomberg Municipal Index; high yield municipal: Bloomberg High Yield Municipal Index; short duration high yield municipal: S&P Short Duration Municipal Yield Index; taxable municipal: Bloomberg Taxable Municipal Bond Index; U.S. aggregate bond: Bloomberg U.S. Aggregate Bond Index; U.S. Treasury: Bloomberg U.S. Treasury Index; U.S. government related: Bloomberg U.S. Government-Related Index; U.S. corporate investment grade: Bloomberg U.S. Corporate Index; U.S. mortgage-backed securities; Bloomberg U.S. Mortgage-Backed Securities Index; U.S. commercial mortgage-backed securities: Bloomberg CMBS ERISA-Eligible Index; U.S. asset-backed securities: Bloomberg Asset-Backed Securities Index; preferred securities: ICE BofA U.S. All Capital Fixed income investment grade Index; high yield 2% issuer capped: Bloomberg High Yield 2% Issuer Capped Index; senior loans: Credit Suisse Leveraged Loan Index; global emerging markets: Bloomberg Emerging Market USD Aggregate Index; global aggregate: Bloomberg Global Aggregate Unhedged Index.
The views and opinions expressed are for informational and educational purposes only as of the date of production/writing and may change without notice at any time based on numerous factors, such as market or other conditions, legal and regulatory developments, additional risks and uncertainties and may not come to pass. This material may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections, forecasts, estimates of market ways to make money fast in las vegas, and proposed or expected portfolio composition. Any changes to assumptions that may have been made in preparing this material could have a material impact on the information presented herein by way of example. Past performance is no guarantee of future results. Investing involves risk; principal loss is possible.
All information has been obtained from sources believed to be reliable, but its accuracy is fixed income investment grade guaranteed. Fixed income investment grade is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, fixed income investment grade, decisions based on such information and it should not be relied on as fixed income investment grade. For term definitions and index descriptions, please access the glossary on www.oldyorkcellars.com Please note, fixed income investment grade, it is not possible to invest directly in an index.
A word on risk
Investing involves risk; principal loss is possible. Debt or fixed income securities are subject to market risk, credit risk, interest rate risk, call risk, derivatives risk, dollar roll transaction risk and income risk. As interest rates rise, bond prices fall. Below investment grade or high yield debt securities are subject to liquidity risk and heightened credit risk. Preferred securities are subordinated to bonds and other debt instruments in a company’s capital structure and therefore are subject to greater credit risk. Foreign investments involve additional risks, including currency fluctuation, political and economic instability, lack of liquidity and differing legal and accounting standards. Asset-backed and mortgage-backed securities are subject to additional risks such as prepayment risk, liquidity risk, default risk and adverse economic developments. The value of convertible securities may decline in response to such factors as rising interest rates and fluctuations in the market price of the underlying securities. Senior loans are subject to loan settlement risk due to the lack of established settlement standards or remedies for failure to settle. These investments are subject to credit risk and potentially limited liquidity, as well as interest rate risk, currency risk, prepayment and extension risk, and inflation risk.
Investors should contact a tax advisor regarding the suitability of tax-exempt investments in their portfolio. If sold prior to maturity, municipal securities are subject to gain/losses based on the level of interest rates, market conditions and the credit quality of the issuer. Income may be subject to the alternative minimum tax (AMT) and/or state and local taxes, based on the state of residence. Income from municipal bonds held by a portfolio fixed income investment grade be declared taxable because of unfavorable changes in tax laws, adverse interpretations by the Internal Revenue Service or state tax authorities, or noncompliant conduct of a bond issuer. It is important to review your investment objectives, risk tolerance and liquidity needs before choosing an investment style or manager.
Nuveen provides investment advisory solutions through its investment specialists.
Investment Grade Credit Fixed Income
Disclosure
Sources for data noted above are from APX, BondEdge and Bloomberg Index Services Limited as of the date specified.
Returns from April 1, forward are for the Investment Grade Credit composite. Prior to this date, returns were those of a carve-out of all investment-grade corporate bonds held in our Core Fixed Income composite.
Barrow Hanley gross returns are shown before investment management fees and custody expenses. Index returns do not reflect transaction costs, management fees, and other expenses. Performance is expressed in U.S. currency. Net returns are calculated using a model fee. The model fee is based on the highest tier of our standard fee schedule. Barrow, Hanley, Mewhinney & Strauss, LLC claims compliance with the Global Investment Performance Standards (GIPS®). GIPS® is a registered trademark of CFA Institute. CFA Institute does not endorse or promote this organization, nor does it warrant fixed income investment grade accuracy or quality of the content contained herein.
Bloomberg Index Services Limited. BLOOMBERG® is a trademark and service mark of Bloomberg Finance L.P. and its affiliates (collectively "Bloomberg"). BARCLAYS® is a trademark and service mark of Barclays Bank Plc (collectively with its affiliates, "Barclays"), used under license. Bloomberg or Bloomberg’s licensors, including Barclays, own all proprietary rights in the Bloomberg Barclays Indices. Neither Bloomberg nor Barclays approves or endorses this material, or guarantees the accuracy or completeness of any information herein, or makes any warranty, express or implied, as to the results to be obtained therefrom and, to the maximum extent allowed by law, neither shall have any liability or responsibility for injury or damages arising in connection therewith.
All institutional product information has been provided by Barrow, Hanley, Mewhinney & Strauss, LLC. Any questions about this material or requests for additional information may be made directly to the firm by contacting us here.
What Does Investment Grade Mean?
Credit ratings provide a useful measure for comparing fixed-income securities, such as bonds, bills, and notes. Most companies receive ratings according to their financial strengths, prospects, and past history. Companies that have manageable levels of debt, good earnings potential, and good debt-paying records will have good credit ratings.
Investment grade refers to the quality of a company's credit, fixed income investment grade. To be considered an investment grade issue, the company must be rated at 'BBB' or higher by Standard and Poor's or Moody's. Anything below this 'BBB' rating is considered non-investment grade. If the company or bond is rated 'BB' or lower it is known as junk grade, in which case the probability that the company will repay its issued debt is deemed to be speculative.
Key Takeaways
- Credit ratings provide a useful measure for comparing fixed-income securities, such as bonds, bills, and notes.
- Any purchase or sale of bonds, bills or notes, will have an associated credit rating, fixed income investment grade.
- In finance, government and private fixed income securities, such as bonds and notes, are considered investment grade fixed income investment grade they have a low risk of default.
Any purchase or sale of bonds, bills or notes, will have an associated credit rating. This rating changes over time as the company's strength and debt load changes. If a company takes on more debt than it can handle or if its earnings outlook weakens, it will lower the company's rating. If it reduces its debt or finds a way to increase potential earnings, fixed income investment grade, the company's rating will usually increase.
Which Securities Are Considered Investment Grade?
In finance, government and private fixed income securities, such as bonds and notes, are considered investment grade if they have a low risk of default. Investment grade is determined based on a relative scale by credit rating fixed income investment grade such as Standard & Poor's and Moody's. Such credit ratings express the ability and willingness of a borrowing organization to repay its debt and are based on many financial and economic indicators that influence the borrower's creditworthiness. Securities with a rating of BBB or above from Standard and Poor's or Baa3 or above from Moody's are considered investment grade.
Credit Ratings and Creditworthiness
Credit ratings represent forward-looking statements about the creditworthiness and credit risk of a particular organization in meeting its financial obligations. The credit ratings indicate a default risk for an individual debt, a municipal bond, a government bond or mortgage-backed securities (MBS).
When constructing its rating, fixed income investment grade, the credit rating agency takes into account a myriad of factors to come up with a well-balanced view of credit risk. Leverage, cash flows, earnings, fixed income investment grade, interest coverage fixed income investment grade, and other financial ratios are common indicators that the credit rating agency considers to assign an investment grade to a specific security.
A security has an investment grade rating if it has a rating that falls within the range of Aaa to Baa3 from Moody's or AAA to BBB- for Standard & Poor's. The company's securities have investment grade ratings if it has a strong capacity to meet its financial commitments.
The rating of BBB- from Standard & Poor's and Baa3 from Moody's represents the lowest possible ratings for a security to be considered investment grade. BBB- and Baa3 ratings indicate that the company that issued such securities has an adequate capacity to meet its obligations, fixed income investment grade, but it can be subject to adverse economic conditions and changes in financial circumstances.
The rating of BBB- from Standard & Poor's and Baa3 from Moody's represents the lowest possible ratings for a security to be considered investment grade.
Losing Investment Grade Ratings
It is common for a security to lose its investment grade rating. The reasons for such events vary and can be related to changes in the overall business environment such as recession, industry-specific problems or the company's financial problems.
You should take rankings from credit rating agencies with caution.
If there is a recession, it is likely that many companies are struggling to generate enough cash flow to cover their interest and principal repayments, and credit agencies can lower the rating of companies across sectors. A change in technology or the emergence of a rival within an industry can also warrant downgrades of securities rating from investment grade to speculative grade. Another common reason for the loss of a security's investment grade is due to the company's problems, such as taking too much leverage, problems with collecting on accounts receivable and regulatory changes.
You should take rankings from credit rating agencies with caution. During the financial crisis ofit became evident that credit rating agencies misled the public by giving AAA rating to the highly complex mortgage-backed securities fixed income investment grade. It turned out that these MBS were high-risk investments and their ratings were soon downgraded to speculative grade from investment grade, fixed income investment grade.
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