For many years, the U.S. government was considered the gold standard for good credit. With its tax power and financial health, it was regarded as one of the safest investments in the world. This picture changed after the recession.
Government Credit Downgrade
In 2011, Standard & Poor’s downgraded the U.S. credit rating from AAA to AA+, which at that time was a lower rating than Canada, Germany, and the United Kingdom. In fact, Microsoft and Johnson & Johnson had higher credit ratings than the country itself.
Not Everything is About the AAA Rating
When comparing the bonds of these companies to U.S. Treasury bonds, it’s important to consider a few things. Although these two companies have higher ratings than the U.S. government, they still offer higher yields because corporate bonds trade at a higher yield than government bonds. This difference is known as the yield spread. Since these two companies are financially strong, and thus at lower risk of default, their spread is typically lower than the average corporate bonds.
Frequently Asked Questions
What is the current yield on AAA corporate bonds?
The average yield on AAA corporate bonds with a term of 20 years or more in October 2021 was 2.68%. Bond yields change continuously in response to broader market conditions, so if you want the latest numbers, please check the data kept by the Federal Reserve Bank of St. Louis.
How can I buy AAA corporate bonds?
When it comes to investing in AAA corporate bonds, you have three main options, all of which will require access to the market through a brokerage account. The first option is to buy a new “initial issue” bond directly from the company as it is created. The second option is to use the secondary market, where you can buy and sell bonds with other traders. The third option is to use a corporate bond fund. With a bond fund, you will pay a fund manager to automatically manage a portfolio of bonds that meet a specific investment goal outlined in the fund details. These funds can be exchange-traded funds or mutual funds.
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Sources:
– Reuters. “U.S. loses precious AAA credit rating from S&P.”
– S&P Global. “Fitch affirms J&J rating on consistent operational and financial performance.”
– Securities and Exchange Commission. “Form 10-K: Microsoft Corporation.”
– Moody’s. “Moody’s Rating Process.”
– S&P Global Ratings. “Definitions of S&P Global Ratings.”
– IASG. “S&P downgrades U.S. credit rating.”
– Committee for a Responsible Federal Budget. “The deficit was not this high when the economy was strong.”
Source: https://www.thebalancemoney.com/u-s-companies-rated-aaa-higher-than-u-s-government-bonds-417105
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