The bond market, known as the debt or the credit market, is where investors go to buy and sell debt securities issued by corporations or governments. The U.S. bond market is more than 30 percent larger than the stock market in terms of total value of securities traded.
Bonds are given an investment grade, denoting the risk a bond has of defaulting. A bond with a “AAA” or “A” rating is high-quality, while an “A”- or “BBB”-rated bond is medium risk. Bonds with a BB rating or lower are considered to be high-risk.
Bonds are susceptible to risks such as inflation and interest rates. Aren’t those key topics of the day/month/year? So. Shouldn’t we be paying attention?
In LQD: 45% of the bonds it holds are rated BBB; 46% are rated A; 1% rated AAA; and 6% rated AA.
Monthly and daily charts of big bond-holding issues, LQD and IEF:
If there is economic trouble – a major credit event or the economy starts to turn – credit-rating agencies will downgrade bonds. If their (45% of) BBB bonds are lowered to junk, LQD will be required by their prospectus to sell them. Just the downgrade(s) will cause LQD to fall. Who is buying bonds then?
No way to know how this plays out and what will happen, but the risk is worth watching.
