Not all triple-B rated bonds are created equal. The financial press has recently made a fuss over the large portion of the corporate bond market that is currently rated “BBB”. This has stoked fear and led many investors to question whether or not they should be buying these bonds because as most of the articles state, “BBB” rated bonds are only a notch away from becoming high-yield/junk bonds. Basing an investment decision on a blanket idea like “avoid ‘BBB’ rated bonds” is an oversimplification and will likely lead to missed opportunities for many investors. Take a look at the chart below…
Click here to enlarge
Source: Bloomberg LP
There is a lot going on there, right? That’s the point. Each of these curves represent a different “BBB” rated curve. As you can see, “BBB” is not a single bond or a single curve, it covers a wide range of yield (i.e. risk) levels. One reason for this is that the “BBB” rating category consists of BBB+, BBB, and BBB- (I’ll stick with the Moody’s scale for simplicity). So in the “BBB” rated category that is “a notch from being junk”, you have BBB+ rated bonds that are actually three notches from being high-yield. BBB+ is also three notches away from being A+, which would put it in the company of some of the highest rated corporates you can find, but these doom-and-gloom articles never mention that.
Some of the variation on the curves above is also attributable to the various sectors that are represented. Different sectors are going to carry more or less risk depending on market dynamics, just as no two issuers within the same sector are going to have identical risk characteristics. “BBB” does not represent a single level of risk. Within the “BBB” space, there are riskier names that might be on the verge of high-yield and there are very high-quality and stable names that are on the verge of being upgraded to an ‘A’ rating. There are bonds that were high-yield last year and have since been upgraded and are on the upswing. There are bonds that are trading at high-yield levels due to the perceived risk in that particular name just as there are bonds that are trading at ‘A’ levels because the market thinks they are safer than their “BBB” rating. You get the idea…
Should you ignore the rating on a bond when considering if a bond is suitable for your portfolio? Absolutely not… the rating tells us a lot about a bond and its potential risk, but it also should not be your only criteria. Raymond James has an extensive team of fixed income professionals including traders, strategists, and high-net worth specialists who can work with your advisor to identify value in the fixed income space and help to develop a strategy that aligns with your individual goals and risk tolerance. Might some “BBB” bonds not be appropriate for your portfolio? Yes, there are likely many bonds that may not work, but there could potentially be many “BBB” rated bonds that would be appropriate from a risk perspective in addition to providing beneficial yield (income) to the portfolio. Don’t eliminate an entire (and very large) part of the market from consideration… let us help you dig a little deeper.
To learn more about the risks and rewards of investing in fixed income, please access the Securities Industry and Financial Markets Association’s “Learn More” section of investinginbonds.com, FINRA’s “Smart Bond Investing” section of finra.org, and the Municipal Securities Rulemaking Board’s (MSRB) Electronic Municipal Market Access System (EMMA) “Education Center” section of emma.msrb.org.
The author of this material is a Trader in the Fixed Income Department of Raymond James & Associates (RJA), and is not an Analyst. Any opinions expressed may differ from opinions expressed by other departments of RJA, including our Equity Research Department, and are subject to change without notice. The data and information contained herein was obtained from sources considered to be reliable, but RJA does not guarantee its accuracy and/or completeness. Neither the information nor any opinions expressed constitute a solicitation for the purchase or sale of any security referred to herein. This material may include analysis of sectors, securities and/or derivatives that RJA may have positions, long or short, held proprietarily. RJA or its affiliates may execute transactions which may not be consistent with the report’s conclusions. RJA may also have performed investment banking services for the issuers of such securities. Investors should discuss the risks inherent in bonds with their Raymond James Financial Advisor. Risks include, but are not limited to, changes in interest rates, liquidity, credit quality, volatility, and duration. Past performance is no assurance of future results.
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