Fixed income
Crossover credit
Crossover credit refers to bonds that straddle the line between investment grade and high yield credit ratings. These bonds are typically rated BBB (the lowest investment grade rating) by S&P or Fitch, or Baa by Moody's, and BB (the highest high yield rating) by the same agencies. As a result, crossover credit exists in the ‘crossover zone’ between higher-quality and riskier debt.
Key Characteristics
Dual market appeal: Crossover bonds attract both conservative investors seeking stability and higher-risk investors chasing yield.
Higher yields: Compared to higher-rated investment grade bonds, crossover bonds often offer better yields to compensate for slightly higher credit risk.
Potential for upgrades or downgrades: Crossover bonds are sensitive to credit rating changes, which can push them into investment grade or high yield categories, impacting their market appeal and pricing.
A long history of innovation
Why is crossover credit Important?
Crossover credit is a critical segment of the fixed-income market because:
It provides opportunities for active managers to capture mispriced bonds.
It plays a pivotal role during market transitions, such as economic recoveries or downturns, where upgrades and downgrades are common.
It can enhance portfolio diversification by blending elements of investment grade stability and high yield potential.
Crossover bonds are attractive to institutional investors and active managers who seek to exploit inefficiencies in credit ratings and valuations. These securities can serve as a middle ground, offering both reasonable credit quality and attractive yields.