As the latest bouts of volatility have been racking the stock markets, 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.
Now, it appears that Asia is facing the same problem with investment-grade corporate debt down 1%, according to an article in the Wall Street Journal. Like the U.S., BBB bonds make up a good portion of investment-grade debt in Asia–44%–and they, too, are on the verge of a falling into high-yield or “junk” status.
A number of investors are worried that Moody’s Investors Service will take these Asia BBB bonds and knock them down a notch lower–the downgrade, of course, putting a majority of them into the less-than-investment-grade category.
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