Are AAA rated bonds safe?
Bonds rated AAA have the highest ratings assigned by rating agencies. They carry the smallest degree of investment risk. Issuer's capacity to pay interest and principal is extremely strong. Bonds rated AA are judged to be of high quality by all standards.
AAA-rated bonds have a high degree of creditworthiness because their issuers are easily able to meet financial commitments and have the lowest risk of default.
Historically, investment-grade bonds witness a low default rate compared to non-investment grade bonds. For example, S&P Global reported that the highest one-year default rate for AAA, AA, A, and BBB-rated bonds (investment-grade bonds) were 0%, 0.38%, 0.39%, and 1.02%, respectively.
Credit Ratings
The safest bonds—AAA, AA, A, and BBB—have a one-year probability of default that is less than 0.1 percent. 4 Speculative-grade bonds—BB, B, and CCC—are considerably riskier.
Either way, bond ratings are scaled differently depending on the rating agency, and it's important to know the similarities and differences across rating firms. For Standard & Poor's, AAA is the best rating, followed by AA, A, BBB, BB, B, CCC, CC, and C.
Low-Risk Investment: AAA bonds are considered the safest investment option, as they have very low chances of default. Stable Returns: AAA bonds provide predictable and stable returns, making them an ideal investment for those seeking regular income.
Basic Info. Moody's Seasoned Aaa Corporate Bond Yield is at 5.40%, compared to 5.34% the previous market day and 4.53% last year. This is lower than the long term average of 6.46%.
And across the aggregate of Investment grade bonds (AAA to BBB), the expected probability of default is 0.82% over 5 years, compared to 7.37% for Speculative grade bonds.
Currently there are only two companies in the United States with an AAA credit rating: Microsoft and Johnson & Johnson.
A company or government may declare bankruptcy, but that doesn't make its bonds worthless. Bankruptcy laws govern how a bond issuer goes out of business or attempts to reorganize its finances. Faced with bankruptcy, a bondholder can choose to sell their bonds or hold on, anticipating a reorganization.
Why would investors buy a poorly rated bond?
Some investors buy junk bonds to profit from potential price increases as the financial security of the underlying company improves, and not necessarily for the return of interest income.
The ratings assigned to bonds by the major rating agencies are not perfect, but they are a good place to start. The economy moves too fast today to simply buy and hold individual investment-grade corporate bonds. Investors should follow the trends in bond ratings if they want to hold individual bonds.
Bonds with a rating of BBB- (on the Standard & Poor's and Fitch scale) or Baa3 (on Moody's) or better are considered "investment-grade." Bonds with lower ratings are considered "speculative" and often referred to as "high-yield" or "junk" bonds.
Bonds that are rated AAA have the highest possible rating. The issuers of these bonds have the highest creditworthiness and are expected to easily meet financial obligations. AAA bonds have the lowest risk of default.
S&P ratings are issued to long-term issuers of credit and insurance companies on a letter-based scale. The first rating is AAA, while the second highest is AA. Anything that falls in the A class is considered high quality, and the debt issuer has a strong likelihood of meeting its financial obligations.
Company | Ticker | Credit Rating |
---|---|---|
Johnson & Johnson | (JNJ) | AAA |
Microsoft | (MSFT) | AAA |
Alphabet | (GOOGL) | AA+ |
Apple | (AAPL) | AA+ |
Home / Economy / Articles / What is the US credit rating, and what does its downgrade mean? On August 1, 2023, Fitch Ratings, one of the country's three major credit rating agencies, announced that it had downgraded the US credit rating from AAA to AA+.
Issuer's capacity to pay interest and principal is extremely strong. Bonds rated AA are judged to be of high quality by all standards. They differ from the highest rated (AAA) bonds only in small degree. Issuer's capacity to pay interest and principal is very strong.
'aaa' ratings denote the best prospects for ongoing viability and lowest expectation of failure risk. They are assigned only to financial institutions with extremely strong and stable fundamental characteristics, such that they are most unlikely to have to rely on extraordinary support to avoid default.
The 1-year incidence of probable rupture by initial AAA diameter was 9.4% for AAA of 5.5 to 5.9 cm, 10.2% for AAA of 6.0 to 6.9 cm (19.1% for the subgroup of 6.5-6.9 cm), and 32.5% for AAA of 7.0 cm or more.
How often do BBB bonds fail?
For example, a BBB-rated bond has a probability of default over five years of 1.48%.
BBB/Baa is the lowest rating that qualifies for commercial bank investments. It's a borderline group for which, in Standard & Poor's words, adverse economic conditions or changing circ*mstances are more likely to lead to a weakened capacity to pay interest and repay principal than for bonds in higher-rated categories.
The Bottom Line
Fidelity. "Bond Ratings." Fitch Ratings. "Fitch Downgrades the United States' Long-Term Ratings to 'AA+' from 'AAA'; Outlook Stable.
Even if the stock market crashes, you aren't likely to see your bond investments take large hits. However, businesses that have been hard hit by the crash may have a difficult time repaying their bonds.
So, if the bond market declines or crashes, your investment account will likely feel it in some way. This can be especially concerning for investors with portfolios heavily weighted toward bonds, such as those in or near retirement.