We believe the spotlight on the burgeoning BBB credit market has diverted attention from the risks in the smaller single-A market.
Bond investors will need to be very selective due to recent changes in sector credit quality.
Financial media and investors have been focusing on the BBB segment of the U.S. investment grade (IG) corporate bond market this year.
Years of significant growth in the U.S. corporate bond market have been accompanied by a steady decrease in overall credit quality and a trend toward higher leverage. Close to $80 billion in U.S. corporate bonds currently rated BBB potentially could be downgraded below investment grade in 2018, according to our estimates.
Investors may want to consider taking a more cautious and selective approach to BBB nonfinancial corporate bonds, particularly those in the low BBB rated segment, where the risk of downgrades is higher and the room for error is lower.
That said, we find many compelling BBB bonds in the U.S. marketplace today. As a large active fixed income manager, PIMCO is in our view ideally positioned to manage the risks in the complicated universe of BBB bonds.
