Investment-grade bonds are bonds whose issuers have been judged by credit rating agencies to have a relatively low risk of default. The dividing line is a credit rating of BBB- or higher from S&P Global Ratings or Fitch Ratings, or Baa3 or higher from Moody's. Bonds rated below that line are called high-yield or junk bonds.
The label matters far beyond the rating itself. Many pension funds, insurers, bank treasuries and mutual funds are limited by law, regulation or their own mandates to holding mostly investment-grade debt, so crossing the boundary in either direction changes who can own a bond. Investment-grade issuers include most developed-market governments, large utilities, banks and well-established industrial companies.
Investment-grade bonds in plain terms
Imagine a school report that grades borrowers from A to F. Investment grade is the group of borrowers who passed: they have a solid record and are expected to keep paying. Lenders still demand a little extra over the safest borrowers, but not much.
The line between a low pass and a fail is important because many careful lenders are told they may lend only to borrowers who passed. When a borrower slips just below the line, a large crowd of lenders has to leave at once, which is why that one notch moves prices so much.
Where the investment-grade line sits
The three largest agencies use similar letter scales. Their investment-grade bands are:
| Band | S&P and Fitch | Moody's |
|---|---|---|
| Highest quality | AAA | Aaa |
| High quality | AA+, AA, AA- | Aa1, Aa2, Aa3 |
| Upper medium | A+, A, A- | A1, A2, A3 |
| Lower medium (lowest investment grade) | BBB+, BBB, BBB- | Baa1, Baa2, Baa3 |
Very few issuers hold the top grade. The United States government lost its last AAA rating when Moody's cut it to Aa1 on 16 May 2025, following S&P's downgrade to AA+ in 2011 and Fitch's in August 2023. The BBB band has become the largest part of the US and European corporate bond markets since the 2008 financial crisis, as companies borrowed more while rates were low.
Yield, spread and price behaviour
Investment-grade bonds pay a modest credit spread over government debt of the same maturity. Because the spread is small, most of their price movement comes from changes in the general level of interest rates, so interest rate risk usually matters more to holders than credit risk. High-yield bonds behave the other way round and often move with the stock market.
This makes investment-grade debt a common core holding in a bond fund and in balanced portfolios. Its yield to maturity is the main figure buyers compare across issues, and the gap between investment-grade and high-yield spreads is closely watched as a gauge of investor fear.
Fallen angels and rising stars
A bond that is downgraded from investment grade to high yield is called a fallen angel. The move often forces sales by investors whose rules forbid sub-investment-grade holdings, and the selling can push the price below what the issuer's finances alone would justify. Ford Motor Company, for example, lost its investment-grade ratings in 2005 and again in 2020 before regaining them. The opposite move, from high yield to investment grade, produces a rising star, which opens the bond to a much larger pool of buyers.
Regulators also use the line. Bank capital rules under Basel III assign lower risk weights and smaller haircuts to highly rated debt, and central banks take investment-grade bonds as collateral in their lending operations. In the US, the Dodd-Frank Act of 2010 required federal agencies to remove references to ratings from their rules where possible, but the investment-grade label remains embedded in private mandates and index rules.
Investors who want broad exposure usually buy an index fund rather than single bonds. The most widely followed US benchmark for the high-quality bond market, the Bloomberg US Aggregate Bond Index, admits only investment-grade securities, and many corporate bond ETFs track investment-grade indexes that drop bonds as soon as they are downgraded. Because these indexes weight issuers by the amount of debt outstanding, the most heavily indebted borrowers make up the largest positions, a feature critics point to when arguing for other weighting methods.
Limitations of the label
Investment grade is a judgement, not a guarantee. Ratings can lag events, and issuers rated investment grade have defaulted within months, as Enron did in 2001 and Lehman Brothers did in 2008. Many mortgage-backed securities rated AAA before 2008 suffered heavy losses. The label also says nothing about price risk from rising rates: high-quality long-dated bonds fell sharply in value in 2022 as rates rose, without any change in their ratings.