The credit quality of the US corporate bond market continues to drift lower despite the economic recovery of recent years. The volume of BBB rated bonds is coming close to top the volume of A rated issues in the $4.7 trillion market, according to Fitch’s new “U.S. Corporate Bond Market: Third-Quarter 2013 Rating and Issuance Activity” report.
But according to some companies in the NeuGroup universe, this doesn’t mean those triple-Bs are unattractive. Companies are stretching their investment guidelines to include lower credits; and for some time now, the credit of a BBB industrial has been seen as more popular than that of a single-A financial with who-knows what risk and certainly under the shadow of regulations.
In its report, Fitch says it downgraded 3.9 percent of the corporate bonds it rates in the third quarter, while upgrading only 3 percent. “This trend of generally low volatility, but with a negative bias, has been unchanged post-recession,” the company’s analysts report.
This bias is more pronounced when one views only investment grade bonds. In that pool, the downgrade rate was a bit lower at 3.6 percent, but the upgrade rate was only 1.8 percent. As a result, BBB rated bonds totaled a record $1.5 trillion, while A-rated bonds clocked in at $1.7 trillion in the third quarter, according to Fitch.
Perhaps more worrying, the very bottom rung of the investment grade scale is getting crowded. BBB- rated bonds totaled a record $328 billion, up 9 percent over 2012. Fitch notes that the figure is three times larger than the size of the cohort immediately below it, the first junk rating, BB+.