Risk versus rating

Risk versus rating

Imagine someone told you at the start of the year that by mid-May the Euro Stoxx 50 index would be down 17%, the S&P 500 down 16% and the NASDAQ down over 25%. And then they asked you if you would like to have your money invested in AAA, BBB or CCC-rated assets. Which rating would you have gone for? Be honest. I bet most readers would have chosen AAA. It is, after all, the higher quality part of the credit universe. But does higher quality mean less risk? Unfortunately not. Credit risk is only one side of the equation. The other is interest rate risk.


A sustained period of rising yields is an alien concept to most of us, and it is highlighting some of the challenges of long-dated investing. The first issue that is yields are rising (and rising fast) – for a 1% change in yield, the price of a bond will fall by its duration. The second issue is that the higher quality companies tend to get funding for the longest period of time. How do you feel about buying Apple 40-year paper now? In short, it’s higher yields (led by interest rates) that have led higher quality parts of the credit universe to experience such dire returns versus their lower-rated counterparts (as the chart below highlights).


2022 has been a lesson for many in the dangers of duration, and that contrary to popular belief, risk isn’t linear with rating.

Bank of America Bond Indices.jpg

Source: Bloomberg: ICE Bank of America Bond Indices

More about the authors

Mark Benbow Investment Manager

Mark Benbow, Investment Manager, is a member of the Global Leveraged Finance team.

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