Bond Ratings - Fidelity (2024)

FAQs

Can bond ratings be trusted? ›

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.

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.

BBB- Considered lowest investment-grade by market participants. BB+ Considered highest speculative-grade by market participants. BB Less vulnerable in the near-term but faces major ongoing uncertainties to adverse business, financial and economic conditions.

Investment grade bonds are assigned “AAA” to “BBB-" ratings from Standard & Poor's and Fitch, and "Aaa" to "Baa3" ratings from Moody's. Junk bonds have lower ratings. The higher a bond's rating, the lower the interest rate it will carry, due to the lower risk, all else equal.

Obligations rated Ba are judged to have speculative elements and are subject to substantial credit risk. Obligations rated B are considered speculative and are subject to high credit risk. Obligations rated Caa are judged to be of poor standing and are subject to very high credit risk.

Default Rates for Global Corporate 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.

However, many investors don't realize the differences in risk and yield between each rating level. (Note: For this discussion, I'm using the S&P rating system of AAA, AA, A, B, etc.) The highest-rated bonds, AAA, are extremely unlikely to default. In fact, AAA-rated bonds have a 0% default rate since 1981.

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 highest-quality bonds are rated Aaa at Moody's and AAA at S&P and Fitch, with the scales declining from there. Moody's ratings of Baa3 and BBB at S&P and Fitch are considered the lowest investment-grade ratings. Ratings below this are considered high-yield or junk.

Is BBB a junk bond? ›

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.

Bond ratings help investors understand the risks involved in buying fixed income securities. They are issued as letter grades by ratings agencies to indicate whether bond issuers are more or less likely to reliably make interest payments and return the principal investment once a bond reaches maturity.

Highlights: While older models of credit scores used to go as high as 900, you can no longer achieve a 900 credit score. The highest score you can receive today is 850. Anything above 800 is considered an excellent credit score.

We assigned our 'AA-' issuer credit rating to BlackRock Funding Inc. The stable outlook reflects the outlook on parent company BlackRock Inc. In addition, we assigned our 'AA-' rating to BlackRock Funding Inc.'s proposed senior unsecured notes due 2029, 2034, and 2054.

The highest possible rating that a bond may achieve is AAA, which is only bestowed upon those bonds that exhibit the highest levels of creditworthiness. This AAA rating is used by Fitch Ratings and Standard & Poor's, while Moody's uses a similar Aaa lettering.

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.

Standard & Poor's, Moody's and Fitch are registered with the U.S. Securities and Exchange Commission as Nationally Recognized Statistical Rating Organizations (NRSROs). The SEC is the regulatory entity responsible for NRSRO oversight. The SEC provides an RSS feed of their findings on credit rating agency activities.

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.

Moody's Analytics is a top-tier analysis group, offering exceptional coverage of credit ratings, world events, and worldwide risk factors.