Credit rating

Credit rating agencies assess governments, companies and individual bond issues and assign a grade on a letter scale. The three largest agencies, S&P Global, Moody's and Fitch, use similar scales running from AAA (Aaa at Moody's), the strongest, down through AA, A and BBB, then BB, B, CCC and lower, with the lowest grades signalling default or near-default. Pluses, minuses or numbers refine each grade. Bonds rated BBB− (Baa3 at Moody's) or above are called investment grade; anything lower is sub-investment grade, also known as high yield or junk.

Ratings matter because many pension funds, insurers and bond funds are limited by their rules to holding mostly investment-grade debt, so a downgrade below that line can force selling and push up the issuer's borrowing costs. For investors, a rating is a useful shorthand for default risk, but it is only an opinion. Ratings can lag events, and agencies were widely criticised for rating complex mortgage securities too highly before the 2008 financial crisis. A rating also says nothing about interest rate risk: a top-rated long-dated government bond can still fall sharply in price when yields rise.