In the bond universe, credit rating agencies are likened to medical professionals. They conduct checks to determine the health of bond issuers, and then release results of their findings, or ‘health reports’ on the issuers’ credit status. The world’s three biggest credit rating agencies, namely Moody’s Investors Service (Moody’s), S&P Global Ratings (S&P) and Fitch Ratings (Fitch), provide the majority of such services.

IG bonds are those that are given a credit rating of Baa3/BBB- or above by rating agencies. Among IG bonds, those with AAA or Aaa rating are exposed with the lowest credit risk. Meanwhile, bonds rated below Baa3/BBB- are regarded as HY² bonds.

Bond ratings and bond yields¹ are negatively correlated. As bonds with higher ratings are deemed to have relatively lower credit risks, the risk premium that investors seek would also be lower. Thus, bond issuers can offer lower bond yields at relatively lower financing costs.

IG bonds rated BBB- generally receive the most attention. As such bonds are at the lowest notch within the IG space, once issuers encounter any business difficulties or special events, their credit risk could rise and that would have an impact on the credit status. They may then be downgraded to non-IG bonds, or HY² bonds, and become so-called “fallen angels”.

In the first quarter of 2020, the global public health crisis and the oil price collapse made a significant impact on the HY² bond market. S&P data shows that 40³ “fallen angels” were newly categorised as such this year, and more than 120³ were deemed as potential “fallen angels”, as of 31 July.

 

HY² bonds are also commonly known as junk bonds, or non-IG bonds. These are bonds with credit ratings below Baa3/BBB-.

Other than a “fallen angel”, a “rising star” is another common reference in the European and US HY² bond markets. “Rising stars” had originated in the US bond market in the 1980s. At that time, a number of start-up companies in new industries had issued HY² bonds to raise funds, and they eventually became industry leaders. This is why “rising stars” are generally referred to as HY² corporate bonds that could potentially be upgraded to IG as their credit quality improves.

As interest rates could stay low for longer, HY² bonds would likely remain on the radar of investors seeking yield¹.

Still, the credit status of HY² bond issuers could vary, and the extent of default risk is also difficult to be accurately estimated. As such, robust research analysis of bond issuers is key to HY² bond investing.

In the bond universe, credit rating agencies are likened to medical professionals. They conduct checks to determine the health of bond issuers, and then release results of their findings, or ‘health reports’ on the issuers’ credit status. The world’s three biggest credit rating agencies, namely Moody’s Investors Service (Moody’s), S&P Global Ratings (S&P) and Fitch Ratings (Fitch), provide the majority of such services.

IG bonds are those that are given a credit rating of Baa3/BBB- or above by rating agencies. Among IG bonds, those with AAA or Aaa rating are exposed with the lowest credit risk. Meanwhile, bonds rated below Baa3/BBB- are regarded as HY² bonds.

Bond ratings and bond yields¹ are negatively correlated. As bonds with higher ratings are deemed to have relatively lower credit risks, the risk premium that investors seek would also be lower. Thus, bond issuers can offer lower bond yields at relatively lower financing costs.

IG bonds rated BBB- generally receive the most attention. As such bonds are at the lowest notch within the IG space, once issuers encounter any business difficulties or special events, their credit risk could rise and that would have an impact on the credit status. They may then be downgraded to non-IG bonds, or HY² bonds, and become so-called “fallen angels”.

In the first quarter of 2020, the global public health crisis and the oil price collapse made a significant impact on the HY² bond market. S&P data shows that 40³ “fallen angels” were newly categorised as such this year, and more than 120³ were deemed as potential “fallen angels”, as of 31 July.

 

HY² bonds are also commonly known as junk bonds, or non-IG bonds. These are bonds with credit ratings below Baa3/BBB-.

Other than a “fallen angel”, a “rising star” is another common reference in the European and US HY² bond markets. “Rising stars” had originated in the US bond market in the 1980s. At that time, a number of start-up companies in new industries had issued HY² bonds to raise funds, and they eventually became industry leaders. This is why “rising stars” are generally referred to as HY² corporate bonds that could potentially be upgraded to IG as their credit quality improves.

As interest rates could stay low for longer, HY² bonds would likely remain on the radar of investors seeking yield¹.

Still, the credit status of HY² bond issuers could vary, and the extent of default risk is also difficult to be accurately estimated. As such, robust research analysis of bond issuers is key to HY² bond investing.

Conclusion

Market volatility and lower yields are here to stay. Investors, based on their investment objectives and risk appetite, could tap credit ratings as a guide as they diversify⁴ across different income sources for potential yield¹ opportunities, and to help manage portfolio risk⁵.
 

1. Yield is not guaranteed. Positive yield does not imply positive return.
2. High-yield credit refers to corporate bonds which are given ratings below investment grade and are deemed to have a higher risk of default. For illustrative purposes only, exact allocation of portfolio depends on each individual’s circumstances and market conditions. Yield is not guaranteed. Positive yield does not imply positive return.
3. Source: S&P Global Ratings, “Credit Trends: 'BBB' Pulse: The Potential Fallen Angels Total Starts To Decline From Record Highs”, 26.08.2020.
4. Diversification does not guarantee investment return and does not eliminate the risk of loss.
5. Risk management does not imply elimination of risk.

Provided for information only based on market conditions as of date of publication, not to be construed as investment recommendation or advice. Forecasts/ estimates may or may not come to pass.

Investment involves risk. Not all investments are suitable for all investors. Past performance is not a reliable indicator of current and future results. Please refer to the offering document(s) for details, including the risk factors. Investors should consult professional advice before investing. Investments are not similar to or comparable with fixed deposits. The opinions and views expressed here are as of the date of this publication, which are subject to change and are not to be taken as or construed as investment advice. Estimates, assumptions and projections are provided for information only and may or may not come to pass. This document has not been reviewed by the SFC. Issued by JPMorgan Funds (Asia) Limited.