Vanguard Corporate Bond (VCIT) quality
Vanguard Corporate Bond (VCIT) quality
According to it's overview, Vanguard claims its Intermediate-Term Corporate Bond ETF (VCIT) "Invests primarily in high-quality (investment-grade) corporate bonds."
But then we see the breakdown by quality is:
U.S. Government 0.7%
AAA 0.4%
AA 4.9%
A 39.0%
BBB 55.1%
NR -0.1%
Total 100.0%
How can they claim the ETF is primarily high-quality when more than 50% of the portfolio is BBB?
But then we see the breakdown by quality is:
U.S. Government 0.7%
AAA 0.4%
AA 4.9%
A 39.0%
BBB 55.1%
NR -0.1%
Total 100.0%
How can they claim the ETF is primarily high-quality when more than 50% of the portfolio is BBB?
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Re: Vanguard Corporate Bond (VCIT) quality
even Fidelity says:
different agencies have different ratings:Bonds with a rating of BBB- (on the Standard & Poor's and Fitch scale) or Baa3 (on Moody's) or better are considered "investment-grade." Bonds with lower ratings are considered "speculative" and often referred to as "high-yield" or "junk" bonds.
https://www.fidelity.com/learning-cente ... nd-ratings
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Re: Vanguard Corporate Bond (VCIT) quality
so it's an index fund. it is tracking what the index is.NoRoboGuy wrote: ↑Tue May 17, 2022 9:21 pm According to it's overview, Vanguard claims its Intermediate-Term Corporate Bond ETF (VCIT) "Invests primarily in high-quality (investment-grade) corporate bonds."
But then we see the breakdown by quality is:
U.S. Government 0.7%
AAA 0.4%
AA 4.9%
A 39.0%
BBB 55.1%
NR -0.1%
Total 100.0%
How can they claim the ETF is primarily high-quality when more than 50% of the portfolio is BBB?
your question is a good one though. the corporate bond market did not used to be this heavily skewed toward BBB ratings. as discussed here
https://www.insightinvestment.com/unite ... nvergence/
i consider this an example of goodhart's law
https://en.wikipedia.org/wiki/Goodhart%27s_law
if all the market cares about is that issuers be investment grade (BBB and higher) then guess what everything is going to converge to BBB.
I follow swensen and basically put my bonds in treasuries and tips. has paid off this year so far.
cheers,
grok
RIP Mr. Bogle.
Re: Vanguard Corporate Bond (VCIT) quality
Looks like I fell into a semantic trap. So technically BBB is investment grade, but I do not personally consider BBB to be high quality. It seems disingenuous to call BBB high quality, while the next lower tier is "junk".
It reminds me of Starbucks. They do not sell any small drinks. They sell Venti, Grande and Tall.
It reminds me of Starbucks. They do not sell any small drinks. They sell Venti, Grande and Tall.
There is no free lunch.
Re: Vanguard Corporate Bond (VCIT) quality
Because BBB is still within the definition of "investment grade." BBB is the lowest rating that is investment grade, BB is the highest rating for a junk bond.
One source reports "Historically, investment-grade bonds witness a low default rate compared to non-investment grade bonds. For example, S&P Global reported that the highest one-year default rate for AAA, AA, A, and BBB-rated bonds (investment-grade bonds) were 0%, 0.38%, 0.39%, and 1.02%, respectively. It can be contrasted with the maximum one-year default rate for BB, B, and CCC/C-rated bonds (non-investment-grade bonds) of 4.22%, 13.84%, and 49.28%, respectively."
One source reports "Historically, investment-grade bonds witness a low default rate compared to non-investment grade bonds. For example, S&P Global reported that the highest one-year default rate for AAA, AA, A, and BBB-rated bonds (investment-grade bonds) were 0%, 0.38%, 0.39%, and 1.02%, respectively. It can be contrasted with the maximum one-year default rate for BB, B, and CCC/C-rated bonds (non-investment-grade bonds) of 4.22%, 13.84%, and 49.28%, respectively."
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Re: Vanguard Corporate Bond (VCIT) quality
So to counter, how would you set the line between investment grade and high yield? I mean, by definition there is always going to be a bond that scores 1 notch above high yield.NoRoboGuy wrote: ↑Tue May 17, 2022 9:39 pm Looks like I fell into a semantic trap. So technically BBB is investment grade, but I do not personally consider BBB to be high quality. It seems disingenuous to call BBB high quality, while the next lower tier is "junk".
It reminds me of Starbucks. They do not sell any small drinks. They sell Venti, Grande and Tall.
Besides banks, the current environment encourages either very low leverage or very high leverage. Low leverage means few bonds issued, high leverage means many bonds issued. It gets you the lowest weighted cost of capital.
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Re: Vanguard Corporate Bond (VCIT) quality
Simply put, they could define four categories, not two (like high, medium, marginal, and low quality) in clear terms. You make a good point that leverage seems to be a feast or famine arrangement. Not much action in the middle.
Grok87's post linked to a good article explaining the drift down in quality. It might be more useful to investors if ratings were reclassified into something like this: AA or higher: high quality, A to BBB: medium quality, BB: marginal quality, and below BB: low quality.
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Re: Vanguard Corporate Bond (VCIT) quality
I am going to disagree with you. What would be the purpose of diving the 2 major categories into 4 major categories. What functional difference would you expect from bonds of high quality verse medium quality? I mean, there is no real functional difference between BBB and BB bonds. Well, I can't say no functional difference. Sometimes there is a statistical hint of a difference between the 2. Which also ties into my point. It is not like there are hard lines between credit grades. Both relative and absolute risk vary over time. Don't let the clean quantitative grades fool you - it is a fuzzy subject.NoRoboGuy wrote: ↑Tue May 17, 2022 10:13 pmSimply put, they could define four categories, not two (like high, medium, marginal, and low quality) in clear terms. You make a good point that leverage seems to be a feast or famine arrangement. Not much action in the middle.
Grok87's post linked to a good article explaining the drift down in quality. It might be more useful to investors if ratings were reclassified into something like this: AA or higher: high quality, A to BBB: medium quality, BB: marginal quality, and below BB: low quality.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
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Re: Vanguard Corporate Bond (VCIT) quality
However, we would want to consider the default rates cumulatively over a timeframe; usually, bond downgrade over time if they are going to default. A year’s time is normally not enough to highlight their behavior. Also, the survival rate of BB and B are not as slim as the statistics shared would suggest; but CCC usually default and anything lower is almost certain. Of course, we must not forget that bond recovery is also a thing; it does not always happen, but some recovery is the usual result.Elric wrote: ↑Tue May 17, 2022 9:45 pm Because BBB is still within the definition of "investment grade." BBB is the lowest rating that is investment grade, BB is the highest rating for a junk bond.
One source reports "Historically, investment-grade bonds witness a low default rate compared to non-investment grade bonds. For example, S&P Global reported that the highest one-year default rate for AAA, AA, A, and BBB-rated bonds (investment-grade bonds) were 0%, 0.38%, 0.39%, and 1.02%, respectively. It can be contrasted with the maximum one-year default rate for BB, B, and CCC/C-rated bonds (non-investment-grade bonds) of 4.22%, 13.84%, and 49.28%, respectively."
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Re: Vanguard Corporate Bond (VCIT) quality
I do not exactly agree with the article. The claim that the AAA to A should be sold is kind of a bad recommendation; if they were really going to consider downgrading, then why are the yields not going up drastically?NoRoboGuy wrote: ↑Tue May 17, 2022 10:13 pmSimply put, they could define four categories, not two (like high, medium, marginal, and low quality) in clear terms. You make a good point that leverage seems to be a feast or famine arrangement. Not much action in the middle.
Grok87's post linked to a good article explaining the drift down in quality. It might be more useful to investors if ratings were reclassified into something like this: AA or higher: high quality, A to BBB: medium quality, BB: marginal quality, and below BB: low quality.
Here is the charts from 1997 on: I will bar the discussion concerning 2008 and 2020 as anomalies (since if anything, speaks in favor of higher quality bonds). My "average" are rough estimates: I might be wrong here.
- AA: from 1997 on, the yields have stayed at about 1% as the average spread. In 2011 (the worse peak I will consider), it was 2%. At the time the article was written, the yield was about 0.6%. 0.4% off the average and 1.4% off the high. As of the end of April 2022, it was 0.86% https://fred.stlouisfed.org/series/BAMLC0A2CAA.
- A: from 1997 on, the yields have stayed at about 1.25% as the average spread. In 2011, it was 2.5%. At the time the article was written, the yield was about 0.8%. 0.45% off the average and 1.7% from the high. As of the end of April 2022, it was 1.17% https://fred.stlouisfed.org/series/BAMLC0A3CA
- BBB: from 1997 on, the yields have stayed at about 2% as the average spread. In 2011, it was 3.25%. At the time the article was written, the yield was about 1.25%. 0.75% off the average and 2% from the high. As of the end of April 2022, it was about 1.71% https://fred.stlouisfed.org/series/BAMLC0A4CBBB
In short, why be against high-quality bonds? They have never been a major return vehicle, but they have not been risky. Historically by the yield spreads, A and greater have better durability.
Last edited by secondopinion on Wed May 18, 2022 1:56 pm, edited 1 time in total.
Passive investing: not about making big bucks but making profits. Active investing: not about beating the market but meeting goals. Speculation: not about timing the market but taking profitable risks.
Re: Vanguard Corporate Bond (VCIT) quality
I know that VCIT has a small percentage of its portfolio in bonds that are below investment grade, but as a general rule, won't those bonds that are downgraded be dropped from the investment grade index VCIT follows, and therefore dropped from VCIT? If a bond trends down in ratings and eventually defaults, aren't the odds that VCIT sold it before default (granted likely for a loss in principal)?secondopinion wrote: ↑Wed May 18, 2022 10:22 am However, we would want to consider the default rates cumulatively over a timeframe; usually, bond downgrade over time if they are going to default. A year’s time is normally not enough to highlight their behavior.
"No man is free who must work for a living." (Illya Kuryakin)
Re: Vanguard Corporate Bond (VCIT) quality
Yes, there is panic selling when a bond falls from investment grade to high yield. Lots of portfolios have to dump bonds when the cross over. And in a larger context this is a indictment on blindly following credit agency ratings and bond indexing. There is a large gap in pricing between BBB and BB bonds that can't be explained by the default rates. People make good money front running the credit agencies.Elric wrote: ↑Wed May 18, 2022 12:57 pmI know that VCIT has a small percentage of its portfolio in bonds that are below investment grade, but as a general rule, won't those bonds that are downgraded be dropped from the investment grade index VCIT follows, and therefore dropped from VCIT? If a bond trends down in ratings and eventually defaults, aren't the odds that VCIT sold it before default (granted likely for a loss in principal)?secondopinion wrote: ↑Wed May 18, 2022 10:22 am However, we would want to consider the default rates cumulatively over a timeframe; usually, bond downgrade over time if they are going to default. A year’s time is normally not enough to highlight their behavior.
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Re: Vanguard Corporate Bond (VCIT) quality
Right; that is partially my point. VCIT is going to have hardly any defaults. The yearly default rates has little to do with VCIT for the most part.Elric wrote: ↑Wed May 18, 2022 12:57 pmI know that VCIT has a small percentage of its portfolio in bonds that are below investment grade, but as a general rule, won't those bonds that are downgraded be dropped from the investment grade index VCIT follows, and therefore dropped from VCIT? If a bond trends down in ratings and eventually defaults, aren't the odds that VCIT sold it before default (granted likely for a loss in principal)?secondopinion wrote: ↑Wed May 18, 2022 10:22 am However, we would want to consider the default rates cumulatively over a timeframe; usually, bond downgrade over time if they are going to default. A year’s time is normally not enough to highlight their behavior.
Passive investing: not about making big bucks but making profits. Active investing: not about beating the market but meeting goals. Speculation: not about timing the market but taking profitable risks.
Re: Vanguard Corporate Bond (VCIT) quality
i also do not exactly agree with the article. i posted it because it had some data on how the percentage of investment grade bonds that are BBB has increased. i think that is a bad thing. the article writers seem to think it is ok somehow.secondopinion wrote: ↑Wed May 18, 2022 11:28 amI do not exactly agree with the article.NoRoboGuy wrote: ↑Tue May 17, 2022 10:13 pmSimply put, they could define four categories, not two (like high, medium, marginal, and low quality) in clear terms. You make a good point that leverage seems to be a feast or famine arrangement. Not much action in the middle.
Grok87's post linked to a good article explaining the drift down in quality. It might be more useful to investors if ratings were reclassified into something like this: AA or higher: high quality, A to BBB: medium quality, BB: marginal quality, and below BB: low quality.
RIP Mr. Bogle.
Re: Vanguard Corporate Bond (VCIT) quality
Yes, but that isn't really a benefit. If a bond has a 20% probability of defaulting and the recovery would be half its value, the bond will be worth 100% of par if it doesn't default and 50% if it does, averaging 90%. If the fund sells the bond rather than waiting to see whether it defaults, it still takes the 10% expected loss.Elric wrote: ↑Wed May 18, 2022 12:57 pmI know that VCIT has a small percentage of its portfolio in bonds that are below investment grade, but as a general rule, won't those bonds that are downgraded be dropped from the investment grade index VCIT follows, and therefore dropped from VCIT? If a bond trends down in ratings and eventually defaults, aren't the odds that VCIT sold it before default (granted likely for a loss in principal)?secondopinion wrote: ↑Wed May 18, 2022 10:22 am However, we would want to consider the default rates cumulatively over a timeframe; usually, bond downgrade over time if they are going to default. A year’s time is normally not enough to highlight their behavior.
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Re: Vanguard Corporate Bond (VCIT) quality
I can maybe agree with why the quality is degrading (over borrowing cheap debt); but as you said, this is not a good thing for the bond investor to see this.grok87 wrote: ↑Wed May 18, 2022 9:53 pmi also do not exactly agree with the article. i posted it because it had some data on how the percentage of investment grade bonds that are BBB has increased. i think that is a bad thing. the article writers seem to think it is ok somehow.secondopinion wrote: ↑Wed May 18, 2022 11:28 amI do not exactly agree with the article.NoRoboGuy wrote: ↑Tue May 17, 2022 10:13 pmSimply put, they could define four categories, not two (like high, medium, marginal, and low quality) in clear terms. You make a good point that leverage seems to be a feast or famine arrangement. Not much action in the middle.
Grok87's post linked to a good article explaining the drift down in quality. It might be more useful to investors if ratings were reclassified into something like this: AA or higher: high quality, A to BBB: medium quality, BB: marginal quality, and below BB: low quality.
They talk about inefficiencies to keep A and greater bond ratings? Try working for a company that is threatened with non-investment grade downgrade (they were at BBB- with negative outlook); they were scrambling to raise their ratings to the point of shutting down profitable but riskier ventures (which I was the main software developer for one of them; long story that could have had major potential for my career if it succeeded fully). No, the BBB class companies fight for ratings as well; possibly even more if they go too far.
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Re: Vanguard Corporate Bond (VCIT) quality
Back to the point of the initial thread...is anyone concerned that 55% of VCIT is BBB? Yes, it is "investment grade" (barely), and yes VCIT has this ratio because there is a greater amount of BBB-rated bonds comprising the underlying index.
Is this a reason to be concerned?
Is this a reason to be concerned?
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Re: Vanguard Corporate Bond (VCIT) quality
I am not sure. It does make it a little bit riskier, but we should hopefully have some higher returns as well. Unless one is holding a lot of corporate bonds in their portfolio (like 40%+), I do not think it will make much of a difference.NoRoboGuy wrote: ↑Thu May 19, 2022 4:58 pm Back to the point of the initial thread...is anyone concerned that 55% of VCIT is BBB? Yes, it is "investment grade" (barely), and yes VCIT has this ratio because there is a greater amount of BBB-rated bonds comprising the underlying index.
Is this a reason to be concerned?
Passive investing: not about making big bucks but making profits. Active investing: not about beating the market but meeting goals. Speculation: not about timing the market but taking profitable risks.
Re: Vanguard Corporate Bond (VCIT) quality
I do, but not for the reasons you may think.NoRoboGuy wrote: ↑Thu May 19, 2022 4:58 pm Back to the point of the initial thread...is anyone concerned that 55% of VCIT is BBB? Yes, it is "investment grade" (barely), and yes VCIT has this ratio because there is a greater amount of BBB-rated bonds comprising the underlying index.
Is this a reason to be concerned?
Heterogeneous systems tend to be more robust than homogeneous systems. Now, in the credit markets everybody has come up with the same answer for financing their corporations. If the group think came to the wrong answer - well - this is how market bubbles and crashes happen.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
Re: Vanguard Corporate Bond (VCIT) quality
Would the fund be required to dump them if they fall past BBB? If so, I think that is a pretty big reason to be concerned, and a potential future buying opportunity for others.NoRoboGuy wrote: ↑Thu May 19, 2022 4:58 pm Back to the point of the initial thread...is anyone concerned that 55% of VCIT is BBB? Yes, it is "investment grade" (barely), and yes VCIT has this ratio because there is a greater amount of BBB-rated bonds comprising the underlying index.
Is this a reason to be concerned?
Re: Vanguard Corporate Bond (VCIT) quality
Yes. Not instantly, but an index of investment grade bonds will drop bonds that fall below investment grade from the index (I think at the end of the month). A bond fund following that index doesn't have to instantly dump the bond, but will do so in short order, as otherwise it drifts from the index, and from being an investment quality fund.000 wrote: ↑Thu May 19, 2022 5:41 pmWould the fund be required to dump them if they fall past BBB? If so, I think that is a pretty big reason to be concerned, and a potential future buying opportunity for others.NoRoboGuy wrote: ↑Thu May 19, 2022 4:58 pm Back to the point of the initial thread...is anyone concerned that 55% of VCIT is BBB? Yes, it is "investment grade" (barely), and yes VCIT has this ratio because there is a greater amount of BBB-rated bonds comprising the underlying index.
Is this a reason to be concerned?
"No man is free who must work for a living." (Illya Kuryakin)
Re: Vanguard Corporate Bond (VCIT) quality
+1alex_686 wrote: ↑Thu May 19, 2022 5:40 pmI do, but not for the reasons you may think.NoRoboGuy wrote: ↑Thu May 19, 2022 4:58 pm Back to the point of the initial thread...is anyone concerned that 55% of VCIT is BBB? Yes, it is "investment grade" (barely), and yes VCIT has this ratio because there is a greater amount of BBB-rated bonds comprising the underlying index.
Is this a reason to be concerned?
Heterogeneous systems tend to be more robust than homogeneous systems. Now, in the credit markets everybody has come up with the same answer for financing their corporations. If the group think came to the wrong answer - well - this is how market bubbles and crashes happen.
RIP Mr. Bogle.
Re: Vanguard Corporate Bond (VCIT) quality
Let's say that for some random reason <s> we just happen to get into a recession with 55% of the portfolio rated BBB. I wonder if the low risk profile (2 out of 5) assigned to VCIT is just a wee bit overstated...
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Re: Vanguard Corporate Bond (VCIT) quality
I believe this etf is of high quality, but it does have credit risk because it is all corporate bonds. I would be comfortable with the BBB rating, but I am aware that if SHTF in the equity market, this bond fund will more than likely be more correlated to stocks than it would "flee to safety" Treasuries. I own this fund and this etf can provide diversification to the bond portion of your portfolio, but would be a poor choice as a standalone ballast to your equity investments.
Re: Vanguard Corporate Bond (VCIT) quality
There's a reason that the SEC yield of VCIT is 4.37% vs the SEC yield of VGIT (Int. Treasury) being 2.90% - there is more risk.
Re: Vanguard Corporate Bond (VCIT) quality
Yes. They're dropped. Those companies become "fallen angels". There are several funds that will buy them.000 wrote: ↑Thu May 19, 2022 5:41 pmWould the fund be required to dump them if they fall past BBB? If so, I think that is a pretty big reason to be concerned, and a potential future buying opportunity for others.NoRoboGuy wrote: ↑Thu May 19, 2022 4:58 pm Back to the point of the initial thread...is anyone concerned that 55% of VCIT is BBB? Yes, it is "investment grade" (barely), and yes VCIT has this ratio because there is a greater amount of BBB-rated bonds comprising the underlying index.
Is this a reason to be concerned?
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Re: Vanguard Corporate Bond (VCIT) quality
FALN is such an ETF. https://www.ishares.com/us/products/283 ... d-bond-etfexodusNH wrote: ↑Thu May 19, 2022 11:06 pmYes. They're dropped. Those companies become "fallen angels". There are several funds that will buy them.000 wrote: ↑Thu May 19, 2022 5:41 pmWould the fund be required to dump them if they fall past BBB? If so, I think that is a pretty big reason to be concerned, and a potential future buying opportunity for others.NoRoboGuy wrote: ↑Thu May 19, 2022 4:58 pm Back to the point of the initial thread...is anyone concerned that 55% of VCIT is BBB? Yes, it is "investment grade" (barely), and yes VCIT has this ratio because there is a greater amount of BBB-rated bonds comprising the underlying index.
Is this a reason to be concerned?
Good if one like that sort of thing.
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Re: Vanguard Corporate Bond (VCIT) quality
It would still be a 2 because it would be relatively stable compared to the stock market.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
Re: Vanguard Corporate Bond (VCIT) quality
All: if you have more than a passing interest there is quite a lot of historical data out there on corporate bond spreads. Fed Reserve publications have tracked Aaa, Aa, A and Baa yields since January 1919 (NBER.org to fill gaps). Moody's ratings go back to 1909, but Moody's didn't take the indexes that far when they back-calculated them in the later 1920s.
The distribution of ratings (proportion Aaa vs BBB, say) has not been constant, to say the least. There were four macro-waves:
1. 1909 to 1929. Virtually all bonds were rated investment grade or better. Even Baa bonds were a small proportion. No one wanted to lend money for 40 years (a typical maturity in those days) except on sound credit. High-yield bonds were few and far between, mostly fallen angels.
2. 1929 to 1945. The proportion of Baa and high yield bonds soared in the Depression and it took WW II prosperity to recover. Not a few Aaa bonds became Baa bonds--or worse.
-The source here is Hickman, search NBER.org
3. 1945 to 1965. By the end of the war, work outs were mostly complete, and most large bonds were once again investment grade. Over the years a few railroads, once blue chips, ended up back in the Ba or B pile, as that industry sank into desuetude. But once again, a majority of bonds were rated Aaa or Aa. Defaults almost disappeared.
-The source here is Atkinson at NBER.org
4. As the 1960s proceeded, the proportion of Baa bonds began to climb. By the 1980s, under the magic touch of Michael Milken, the high yield category exploded. At the same time, the shift from Aaa to Baa as the major proportion of investment grade bonds gathered steam, until we reach the 55% count seen in the indexes today.
Deteriorating credit quality? Smarter credit rating agencies, more skeptical? A discussion for another day.
PS. through the 1920s the Ba grade, not Baa, marked the bottom of the investment group. The current idea of "investment grade" dates to New Deal bank regulation: as in, "banks, if you own anything worse than Baa, gumnint is coming done on you."
The distribution of ratings (proportion Aaa vs BBB, say) has not been constant, to say the least. There were four macro-waves:
1. 1909 to 1929. Virtually all bonds were rated investment grade or better. Even Baa bonds were a small proportion. No one wanted to lend money for 40 years (a typical maturity in those days) except on sound credit. High-yield bonds were few and far between, mostly fallen angels.
2. 1929 to 1945. The proportion of Baa and high yield bonds soared in the Depression and it took WW II prosperity to recover. Not a few Aaa bonds became Baa bonds--or worse.
-The source here is Hickman, search NBER.org
3. 1945 to 1965. By the end of the war, work outs were mostly complete, and most large bonds were once again investment grade. Over the years a few railroads, once blue chips, ended up back in the Ba or B pile, as that industry sank into desuetude. But once again, a majority of bonds were rated Aaa or Aa. Defaults almost disappeared.
-The source here is Atkinson at NBER.org
4. As the 1960s proceeded, the proportion of Baa bonds began to climb. By the 1980s, under the magic touch of Michael Milken, the high yield category exploded. At the same time, the shift from Aaa to Baa as the major proportion of investment grade bonds gathered steam, until we reach the 55% count seen in the indexes today.
Deteriorating credit quality? Smarter credit rating agencies, more skeptical? A discussion for another day.
PS. through the 1920s the Ba grade, not Baa, marked the bottom of the investment group. The current idea of "investment grade" dates to New Deal bank regulation: as in, "banks, if you own anything worse than Baa, gumnint is coming done on you."
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