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The Downgrade Risks Facing Passive Investment Grade Bondholders

August 2019 
By Sean Markowicz, Strategist, Research and Analytics, Schroders

An economic downturn could cause downgrades in the increasingly growing and highly leveraged BBB-rated corporate bond market, the lowest tier of investment-grade debt (IG).

Sean Markowicz
Strategist, Research and Analytics, Schroders

 

Investors are increasingly worried about the growing size of the BBB-rated corporate bond market, the lowest tier of investment grade (IG) debt. The risk is that much of this segment could be downgraded to high yield (HY) when the next economic downturn occurs. Passive investors could be the most exposed because they would have to sell these “fallen angels” when they exit their respective IG bond index. This tends to be when credit spreads peak and bond prices trough, resulting in the highest crystallized loss. Although not all active managers may outperform, the risks of passive investing may be greater now than they have ever been. 



Important Risks: Investing involves risk, including the possible loss of principal. • Foreign investments may be more volatile and less liquid than U.S. investments and are subject to the risk of currency fluctuations and adverse political and economic developments. 

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