Why bonds of the highest speculative grade rating (Ba1/BB+) are likely to benefit more than A+ bonds from an upgrade as the economy strengthens and intererst rate rise?
Thanks in advance
I don’t know the answer to that from the material, but upgrading from speculative to investment grade usually produces the biggest spread cut and liquidity imporvement based on funds that only invest in IGB.
because there is a new sucker born every minute.
When the economy improves, high-rated bonds go from really unlikely to default to really, really unlikely to default.
Big deal.
When the economy improves, speculative-grade bonds go from likely to default to unlikely to default.
Now _ that’s _ a big deal!
Agree w/ above.
The best way to learn this is to look at HY bonds after 2008: specifically spreads to risk-free like treasuries of similar term, which were incredibly wide, ie HY (“junk”) bonds were priced for a higher than usual probability of default. Consquently when the risk of depression (thanks TARP, QE etc) receded these bonds re-priced (bid up) as the economy improved the aggregate probability of default declined, so spreads narrowed. HY and lower quality IG bonds were classic “risk on” trades. The probability of default for AAA and other high-quality IG was already less, so spreads compress less, ceteris paribus, prices do not rise as much as for HY.
Should not be greater the inverse effect of higher interest rate and lower prices in speculative-grade bonds, which will make investor avoid them and go for A+?
All else the same, the change in the general interest rate levels will affect them all equally, depending on the duration.