Investment Grade
Bonds rated BBB-/Baa3 or above by major rating agencies — considered low enough default risk for institutional investors and pension funds.
Investment grade (IG) refers to bonds rated BBB-/Baa3 or higher by S&P/Fitch and Moody's, respectively. These issuers have strong enough balance sheets that institutional investors — pension funds, insurance companies, and many mutual funds — are permitted or required to hold them.
IG bonds carry tighter credit spreads than high-yield because the probability of default is low. When a company is downgraded below IG to "junk" (a "fallen angel"), it triggers forced selling by institutions that can only hold IG — causing sudden spread widening and price drops.
The IG corporate bond market is massive: over $7 trillion outstanding. Its spread movements are a direct input into corporate CFOs' borrowing cost decisions.
Related Terms
Bond
A debt instrument in which the issuer borrows money from the buyer and promises to pay periodic interest plus return the principal at maturity.
BeginnerCorporate Bond
Debt issued by a company to raise capital, paying a coupon above Treasuries to compensate investors for credit risk.
BeginnerCredit Rating
A graded assessment by agencies like Moody's, S&P, and Fitch of an issuer's ability to repay debt — the standardized scale for default risk.
BeginnerCredit Spread
The yield difference between a corporate (or other non-government) bond and a Treasury of the same maturity — the market's price for credit risk.
IntermediateDefault Risk
The probability that a bond issuer will fail to make scheduled interest or principal payments — the core credit risk in fixed income.
IntermediateHigh-Yield Bond
Bonds rated below investment grade (BB+/Ba1 or lower) — offering higher yields to compensate for elevated default risk.
Intermediate