Every corporate bond falls on one side of a single line. Bonds rated BBB‑ or higher by S&P or Fitch, or Baa3 or higher by Moody’s, are investment grade; bonds rated below that line are non-investment grade, also called speculative grade, high yield, or junk. This page compares the two on definitions, default history, current yields and spreads, recent returns, and how investors use each, using sourced data that is dated or updates daily. For the definition in depth, see the investment grade guide.
Defining the Investment Divide
What makes a bond investment grade?
A rating agency’s judgment that the issuer has adequate (BBB) to extremely strong (AAA) capacity to meet its financial commitments. The four investment grade categories are AAA, AA, A, and BBB (Aaa, Aa, A, and Baa at Moody’s). Many insurance, pension, and money manager mandates are limited to, or weighted toward, investment grade debt, and investment grade indexes include only bonds above the line.
Non-investment grade
Bonds rated BB+/Ba1 and below. Issuers include growing companies, highly leveraged companies such as many private equity owned businesses, and fallen angels, which were downgraded from investment grade. These bonds pay more because defaults are far more common.
Default Rates: The Core Difference
S&P Global Ratings’ long-run study shows how far apart the two groups are.
| Rating group (S&P, global corporates, 1981 to 2024) | 1-year average default rate | 5-year cumulative | 10-year cumulative |
|---|---|---|---|
| Investment grade | 0.08% | 0.77% | 1.69% |
| BBB | 0.14% | 1.36% | 2.86% |
| BB | 0.56% | 5.75% | 10.44% |
| B | 2.93% | 15.60% | 22.02% |
| CCC/C | 26.12% | 46.53% | 50.43% |
| Speculative grade | 3.54% | 13.64% | 19.15% |
Source: S&P Global Ratings, “Default, Transition, and Recovery: 2024 Annual Global Corporate Default And Rating Transition Study,” March 27, 2025, table 24.
Investment grade issuers do default, but rarely: in S&P’s study, the average one-year default rate for the group was under one in a thousand. In 2024, of the 130 defaulters rated at the start of the year, 97 were rated CCC/C.
Yields and Spreads Today
High yield bonds pay more to compensate for that default risk. The table updates each business day.
| Index (rating category) | Effective yield | Option-adjusted spread | Spread range since history start |
|---|---|---|---|
| AAA | 5.81% | 42 bps | 27 to 59 bps (low Aug 15, 2025; high Apr 7, 2025) |
| AA | 5.80% | 61 bps | 41 to 73 bps (low Aug 18, 2025; high Apr 7, 2025) |
| A | 5.84% | 73 bps | 59 to 115 bps (low Jan 22, 2026; high Oct 20, 2023) |
| BBB | 6.19% | 106 bps | 92 to 163 bps (low May 29, 2026; high Oct 20, 2023) |
| Investment grade composite | 5.99% | 86 bps | 73 to 133 bps (low Jan 22, 2026; high Oct 20, 2023) |
| BB | 7.03% | 204 bps | 150 to 311 bps (low Aug 28, 2026; high Oct 20, 2023) |
| Single-B | 8.27% | 329 bps | 254 to 486 bps (low Nov 14, 2024; high Apr 7, 2025) |
| CCC and lower | 17.02% | 1215 bps | 690 to 1215 bps (low Jan 23, 2025; high Oct 1, 2026) |
| High yield composite | 8.22% | 324 bps | 259 to 461 bps (low Jan 22, 2025; high Apr 7, 2025) |
ICE BofA US Corporate (AAA to BBB) and US High Yield (BB to CCC) index effective yields and option-adjusted spreads, from the Federal Reserve Bank of St. Louis (FRED), as of October 1, 2026. The range covers the daily history FRED currently publishes for these series, which begins October 3, 2023. Updated each business day.
Today the high yield composite yields 223 bps more than the investment grade composite, and its spread is 238 bps wider. Over the daily history FRED publishes, the high yield spread has ranged from 259 bps to 461 bps, and the investment grade spread from 73 bps to 133 bps.
Historical Returns
Index returns reported in fund prospectuses filed with the SEC show how the two markets have performed. Over the five years through 2025, a period that included the sharp rise in interest rates in 2022, the investment grade corporate index returned slightly less than zero per year, while the high yield index returned about 4.5% per year. Over ten years high yield also led. In calendar 2022 alone, the Bloomberg US Corporate Index lost about 15.8%.
| Index (average annual total return, periods ended December 31, 2025) | 1 year | 5 years | 10 years |
|---|---|---|---|
| Bloomberg US Corporate Index (investment grade) | 7.77% | −0.09% | 3.27% |
| Bloomberg US Corporate High Yield Index | 8.62% | 4.51% | 6.53% |
| Bloomberg US Aggregate Bond Index (broad investment grade, including Treasuries and mortgages) | 7.30% | −0.36% | 2.01% |
Sources: Bloomberg US Corporate Index returns as reported in Morgan Stanley Institutional Fund Trust and Hartford Mutual Funds summary prospectuses filed in 2026; Bloomberg US Corporate High Yield and US Aggregate returns as reported in Guggenheim (Security Investors) and Angel Oak summary prospectuses filed in 2026. Index returns reflect no fees or expenses. Past performance does not predict future results.
Two things explain the gap. High yield bonds have shorter durations on average, so they lost less when rates rose, and their higher coupons more than offset default losses over the period. Over periods that include a recession with many defaults, high yield can fall much further than investment grade, because defaults are concentrated in lower-rated bonds.
Performance in Different Environments
- Rising interest rates. Investment grade bonds usually have longer durations, so they are more sensitive to rising Treasury yields.
- Recessions and credit stress. High yield spreads can widen more and defaults rise, so high yield can fall further when the economy contracts.
- Recoveries. High yield bonds often rally more as spreads tighten after a downturn.
Comparisons across periods need identical start and end dates and the same return definition for every asset; mixing calendar-year returns with peak-to-trough drawdowns gives misleading results.
Fallen Angels and Rising Stars
A fallen angel is a bond downgraded from investment grade to high yield. Investors limited to investment grade may have to sell, which can push prices down around the downgrade. A rising star moves the other way, from high yield to investment grade, often after the issuer reduces debt. In net lease, a tenant downgrade below the line can widen cap rates on that tenant’s properties because the buyer pool and financing options narrow.
Portfolio Construction Implications
Investment grade bonds generally serve as the stable core of a fixed income allocation and a diversifier against equities; high yield behaves more like a blend of bonds and stocks and adds income with more credit risk. How much of each to hold depends on goals, time horizon, tax bracket, and tolerance for losses in a downturn; there is no single optimal mix. When high yield spreads are narrow, investors are paid less for that risk.
For net lease investors, the same divide applies to tenants. The tenant ratings database labels each tenant investment grade or not, and the bond-to-NNN spread table compares tenant cap rates with bond index yields.
For Owners on the Other Side of the Trade
If you own a net lease property and your tenant’s rating has changed, its value and financing terms may have changed too. Talk with us about refinance and sale options.
Investment Grade vs Non-Investment Grade: Frequently Asked Questions
What is the difference between investment grade and non-investment grade bonds?
The rating. Investment grade bonds are rated BBB‑/Baa3 or higher; non-investment grade bonds are rated BB+/Ba1 or lower. The difference shows up in default rates: in S&P’s 1981 to 2024 study, the ten-year cumulative default rate was 1.69% for investment grade issuers and 19.15% for speculative grade issuers.
Why does the investment grade line matter so much to issuers?
Because it changes who can buy the bonds. Many institutional mandates and index funds hold only investment grade debt, so a downgrade below the line shrinks the buyer base and raises borrowing costs.
Do investment grade bonds ever default?
Yes, but rarely. S&P’s average one-year default rate for investment grade issuers was 0.08% over 1981 to 2024.
What is a fallen angel bond?
A bond downgraded from investment grade to high yield. Forced selling by investment-grade-only holders can pressure the price around the downgrade.
Which performs better over a full credit cycle?
It depends on the period. Over the five and ten years through 2025, the Bloomberg US Corporate High Yield Index returned more per year than the Bloomberg US Corporate Index, helped by rising rates that hurt longer investment grade bonds and by high coupons that more than offset default losses. In recessions with heavy defaults, high yield can fall much further.
Related Reading
Educational content only. InvestmentGrade.com is a commercial real estate brokerage and educational publisher. We do not sell, broker, underwrite, or solicit any bonds, securities, or investment products. Yields, ratings, and prices referenced fluctuate continuously and are sourced from public market data as of the date noted. Nothing on this page constitutes investment advice, an offer to sell, or a solicitation to buy any security. Consult a licensed broker-dealer, registered investment advisor, or tax professional before making any investment decision. For SEC investor education, visit investor.gov.
