There is a reason behind this trend: lower-rated investment-grade companies are the ones that in the past couple of years have been taking on more debt. Thus, they are also the most vulnerable to market shocks because they could be downgraded into junk faster than expected.
Credit erosion in the lower-rated spectrum may turn into downgrades sooner rather than later. Volatility in the market continues to be high, which means that in the long run, there will be limited funding opportunities. Corporate America will find out at its own expenses the difficulties to manage massive cost structures.
It is therefore correct to think that higher rated corporate bonds create a better buffer against volatility, but there is some bad news. They are expensive! And they will probably become more expensive as the Fed continues buying into this space (please refer to “Near-zero US Treasury yields and inflation: an explosive cocktail”).
The good news, however, is that often a downgrade is already priced in lower investment-grade bonds. This means that if the security is downgraded, the price of the bond will not fluctuate as much.
In conclusion, in the investment-grade corporate bond space, there are obvious risks. The challenge is to understand which risk can be acceptable in your overall investment strategy. Even though the lower-rated investment-grade space is vulnerable, it can still provide a nice upside if held until maturity. Better rated IG bonds, on the other hand, can be useful to limit one portfolio's volatility.
Buying a bond is very much like buying a pair of shoes. You need the right size, but you can choose from many different colours.
My right size in maturity is up 4 to 6 years, while my favourite colour is BBB/baa3, what is yours?
Please have a look at the most interesting investment-grade US corporates that we believe are available out there; it may give you some inspiration. If you are a Saxo Bank client click here, if you have a Demo account click here.