Definition
Investment grade bonds are bonds that credit rating agencies judge to have a relatively low risk of default. Junk bonds (also called high yield bonds) are rated below that line, so the agencies see a higher risk that the issuer will miss interest or principal payments.
A credit rating is a letter grade from an agency such as S&P Global, Moody's or Fitch. It is an opinion on the issuer's ability to pay, not a guarantee.
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Where the line sits
| Category | S&P and Fitch scale | Moody's scale |
|---|---|---|
| Investment grade | AAA, AA, A, BBB | Aaa, Aa, A, Baa |
| Junk / high yield | BB, B, CCC, CC, C | Ba, B, Caa, Ca, C |
| In default | D (S&P), RD or D (Fitch) | No separate D grade. Defaulted issuers usually sit at the bottom grades |
Agencies add "+" or "−" (S&P, Fitch) or numeric modifiers (Moody's) inside each grade. The lowest investment grade notch is BBB− on the S&P and Fitch scale. The highest junk notch is BB+.
Edge cases experienced readers should know
- Split rating: one agency rates a bond investment grade and another rates it junk. Index providers and fund rules decide which rating counts. Some use the middle rating, some the lowest.
- Fallen angel: a bond that was investment grade and is downgraded to junk.
- Rising star: a junk bond upgraded to investment grade.
- Outlook and watch: a "negative outlook" or "rating watch" signals a possible change before it happens.
- Issuer vs issue rating: a company has an issuer rating, but a specific bond can be rated higher or lower depending on collateral and seniority.
- Sovereign ceiling: companies in a country are often rated no higher than their government. For a country's current rating, check the agencies' own publications.
Worked example (hypothetical)
Company X has a bond rated BBB−, the lowest investment grade notch. Many pension funds and insurers may only hold investment grade debt.
- An agency downgrades Company X to BB+. The bond is now a fallen angel.
- Funds bound by investment grade rules may have to sell.
- Forced selling pushes the bond's price down. Its yield rises because the fixed coupon is now paid on a lower price.
- The gap between this bond's yield and a government bond of similar maturity widens. That gap is the credit spread, usually quoted in basis points.
The higher yield is payment for higher default risk. It is not extra free return. High yield issuers do default, and investors can lose part or all of the face value.
Where you see these terms
- News: "downgraded to junk", "cut below investment grade", "high yield spreads widen". Wider spreads often appear in stress periods, together with a flight to quality.
- Fund and ETF fact sheets: a breakdown of holdings by rating band.
- Research reports: default rates, spreads and rating migration tables.
- Economic calendars: rating actions on countries, often on emerging markets issuers of Eurobonds.
Traders who follow currency pairs or index CFDs read rating news as part of fundamental analysis. Leveraged CFD and forex trading can lose money fast, and a rating headline can move prices sharply.
Related terms
- Credit spread
- Default
- Bond duration
- Bond auction
- Counterparty
- Credit crunch
- Financial contagion
- Trading glossary
Frequent questions
What is the investment grade meaning in one line?
It means a credit rating of BBB− or higher (S&P, Fitch) or the Moody's equivalent, which signals lower default risk in the agency's view.
What is the junk bonds meaning?
It means bonds rated below investment grade. They are also called high yield or speculative grade bonds.
Why do high yield bonds pay more?
Investors want extra yield to accept a higher chance of missed payments or default.
Is an investment grade bond safe?
No. It carries lower assessed credit risk, but it can still be downgraded, lose value when interest rates rise, or default.
Do all agencies always agree?
No. Split ratings are common near the BBB/BB line, and each fund or index sets its own rule for which rating counts.