Investment grade bonds are fixed-income securities issued by companies or governments that have a high credit rating. These bonds are considered safer than lower-rated bonds because they have a lower risk of default. Investment grade bonds are typically issued by large, stable companies with a strong financial position.
Bond ratings are letter grades assigned by ratings agencies to signal which bond issuers are most likely to make interest payments and return your principal investment. The highest rating is AAA, followed by AA, A, BBB, and so on. Bonds rated BBB or above are considered investment grade.
Many advisors think of investment-grade bond ETFs as index-based products owning bonds rated BBB or above. These ETFs can provide investors with a diversified portfolio of investment grade bonds, making it easier to manage risk.
Historically, bonds have always acted as a kind of ballast for portfolios. During market crashes like those in 2008 and March 2020, bonds helped to offset losses in stocks and other risk assets. Investment grade bonds are particularly useful in this regard because they are less volatile than lower-rated bonds.
Investment grade bond issuance so far this month is more than double last May's levels. This suggests that companies are taking advantage of low-interest rates to issue debt, which could be a sign of confidence in the economy.
Hercules Capital is a leading BDC lending to venture-backed companies, with a $3 billion loan portfolio. The company is investment grade, which means it has a strong financial position and a low risk of default.
High-yield bonds can help investors earn higher returns, but they also come with additional risk. Here are some top high-yield bond funds to consider if you're looking for higher yields:
- iShares iBoxx $ High Yield Corporate Bond ETF (ticker: HYG)
- SPDR Bloomberg Barclays High Yield Bond ETF (ticker: JNK)
- Invesco High Yield Bond Fund (ticker: AHY)
Investment-grade bonds have modestly outperformed Treasuries over the last 15 years, making them a good choice for fixed-income investors. However, with interest rates at historic lows, yields on investment-grade bonds have also fallen, which means they may not provide as much income as they used to.
Yields on highly rated corporate bonds have climbed, but many investors still see better value in government debt. The Federal Reserve's recent decision to keep interest rates low for the foreseeable future has also made government bonds more attractive.
Bond investors, fearing a recession is around the corner and preparing for an end of the Federal Reserve's tightening cycle, have embraced investment grade bonds as a safe haven. In times of economic uncertainty, investment grade bonds can provide stability and a reliable source of income.
Overall, investment grade bonds are a solid choice for investors looking for a low-risk, fixed-income investment. With a strong credit rating and a history of stable returns, these bonds can help to diversify your portfolio and manage risk.
