In addition to flatter yield curves and other concerns, the wall of worry in the bond markets includes a looming downgrade of BBB bonds heading into below-investment grade territory. At the height of the extended bull market, risky less-than-investment-grade bonds were in vogue with their attractive yields, particularly in a rising rate environment, but BBB bonds that are on the cusp of high yield status could be facing a liquidity crisis.

As the volatility seen has been racking the stock markets as of late, it has also affected the bond markets, particularly liquidity–the ability purchase and sell an asset within a reasonable amount of time. BBB bond markets are especially susceptible because institutional investors, who carry war chests full of capital that aid in liquidity, aren’t able to invest in these bonds if they become high yield or “junk” issues.

BBB bonds comprise almost 50% of the $5.8 trillion investment-grade bond market and a lack of liquidity could leave BBB bond investors holding the debt as it toes the line between investment grade and junk bond status–the worry, of course, being that it may eventually fall into the category of the latter.

In the video below, Nick Maroutsos, co-head of global bonds at Janus Henderson Investors, examines downgrades in the BBB bond market. He speaks with Bloomberg’s Jonathan Ferro on “Bloomberg Markets: The Open.”

For more market trends, visit ETF Trends.

Subscribe to our free daily newsletters!
Please enter your email address to subscribe to ETF Trends' newsletters featuring latest news and educational events.