/biz/ - Business & Finance

>>19375742
I saved this pic from November

>>16259738

>>16192343
BBB- is the lowest "investment grade" bond. If it gets downgraded to BB or lower, it's known as a junk bond. Except agencies and brokers prefer to use the term "high yield" instead of "junk".

The lower the rating, the riskier the investment is, but in return the rewards are potentially higher. That's why it's "high yield". As interest rates and investment yields go lower, some people / companies / pension funds feel pressure to "reach for yield" by investing in the riskier assets. Pension funds in particular need to because they have obligations to pay retirees back and there's no way they'd be able to meet all their obligations on a small 1-3% yield. Just like how Social Security is largely unfunded, many state pensions are severely underfunded, and mathematically speaking they just won't be able to pay the vast majority of retirees going into the next few decades.

When corporate bonds are downgraded to junk, it doesn't mean that it's illegal or anything. But it does mean that new creditors will be less likely to lend to you in the future. After all if you're holding the debt and it gets downgraded, it means that the chances you'll never get your money back have just increased. If the company reaches a point where it needs capital to remain solvent and nobody will lend to them, that's usually when bankruptcies happen.