Investment grade

Investment grade means BBB minus or better at Standard and Poor's and Fitch, or Baa3 or better at Moody's. Below it, the market says speculative grade, high yield, or junk. The distinction is a market boundary rather than a description of quality, and almost everything about how a bond is sold changes when you cross it.

An investment grade euro benchmark is typically announced and priced the same day off standing documentation, is usually unsecured, and carries very light covenants because the credit itself is the protection. A high yield deal runs a full roadshow against an offering memorandum, sits behind secured bank debt, and carries a complete incurrence covenant package that substitutes for the weaker credit.

The buyer bases differ accordingly. Investment grade is held largely by insurers and pension funds matching long dated liabilities and buying to hold; high yield is held by dedicated credit funds trading a view, which is why high yield spreads move further and faster and why the market shuts entirely at times.

Because mandates and index rules are written to the rating, the line itself creates a technical effect. Crossing it downwards forces selling by holders who may not own the paper, whatever they think of the price, which is why issuers defend the lowest investment grade notch far harder than the arithmetic alone would justify.