Investment grade bonds: what they are and what they yield

Investment grade bonds are those that the rating agencies judge to have a low risk of default. It is the most important boundary in the bond market: many funds and institutional investors can only buy bonds above this threshold.

Knowing where that boundary lies, and what happens when an issuer crosses it, helps you read the yields you see and understand why two bonds that look similar can be priced very differently.

This guide explains the rating scale used by the three main agencies, what a rating does and does not tell you, why the lowest investment grade step attracts so much attention, and how 10BONDS handles bonds on which the agencies disagree.

The rating scale

The three main agencies use similar scales. These are investment grade:

S&P and Fitch	Moody's	Assessment
AAA	Aaa	Highest quality
AA+, AA, AA-	Aa1, Aa2, Aa3	Very high quality
A+, A, A-	A1, A2, A3	High quality
BBB+, BBB, BBB-	Baa1, Baa2, Baa3	Adequate quality

From BB+ (Ba1 for Moody's) downwards we speak of high yield, also called "speculative".

The plus and minus signs (or the numbers 1, 2 and 3 for Moody's) refine the position within each band: A+ is a little stronger than A, which is a little stronger than A-.

What a rating really says

A rating is the agency's opinion of the issuer's ability to pay coupons and capital. It is not a guarantee and it is not a recommendation to buy. Historically, defaults among investment grade issuers have been much rarer than among high yield issuers, but not impossible. Ratings can also change: an issuer can be downgraded while you hold the bond in your portfolio.

For this reason it is worth treating the rating as a starting point rather than a final verdict, and looking at it together with the spread and the structure of the bond, as explained in the guide on credit risk.

Why the BBB- threshold matters so much

When an issuer falls from BBB- to BB+ it becomes a fallen angel. Many investors are obliged to sell, and the price can fall further than the deterioration in credit alone would justify. This is why BBB- bonds tend to yield a little more than A bonds: the market prices in the risk of crossing the threshold.

The forced selling comes from rules, not from a sudden change in the company itself: funds whose mandate allows only investment grade must reduce or sell their holdings, whatever they think of the issuer.

What they yield

The yield of an investment grade bond depends on market rates, on the duration and on the rating. As a rule, for the same duration, the lower the rating the higher the yield. You can see today's values in the bond finder, updated every day.

When you compare, keep the duration fixed first and then look at how the yield changes as the rating goes down: the gap between bands is the extra return the market pays for the extra risk.

When the agencies disagree

It happens that a bond is BBB- for one agency and BB+ for another. On 10BONDS we use the resolved rating supplied with the data when available, otherwise S&P's, then Moody's, then Fitch's. Bonds without a rating do not appear in our lists. The details are in our methodology.

Split ratings are most common close to the investment grade boundary, which is exactly where the difference matters most. If you hold such a bond, it is worth knowing which rating your bank or fund uses.

Find your 10 bonds: choose the minimum rating with the third slider and look at the 10 bonds.