When to Choose a Single Over a Double

Research Highlights

The ratio of roughly 3 to 1 single-A vs. double-A issuers suggests a liquid market sector and potential for better risk diversification.
One-year default probability but a single-A corporate issuer was 0.02% in the last 10 years. Investing in single-A securities would have increased cumulative credit losses by 0.20% over a five-year span based on data tracing back 23 years. Such benign data includes the onerous credit cycle of 1999-2003.
85 years of historical data reveals better ratings upgrade potential by single-A bonds (3.0%) than double-A’s (.04%) in a given year. Favorable ratings migration is often associated with better potential for principal value appreciation.
The bond market rewarded investors of single-A binds 15 basis points a year in total return over double-A corporate binds in the last 25 years.
Although corporate treasures often consider potential yield pickup as the deciding factor of selecting a single-A investment policy mandate, a stronger argument for single-A securities can be made in their better risk diversification benefits and more investment choices. Due to limited supple of AA corporate binds, investors may be better served by adding fundamentally sound single-A securities to their corporate cash portfolio.

Introduction

Investment-grade corporate bonds are widely viewed as a core fixed income asset class for the vast majority of investors that desire attractive yield, dependable income, safety, diversity and market liquidity. Among several hundred corporate treasury accounts managed by Capital Advisors Group, about 98 percent permit corporate bonds in their portfolios, and 88 percent view bonds rated A or better as eligible investments in their investment guidelines.
In this article, we provide a comparison of risk characteristics and portfolio considerations between corporate bonds rated single-A and those rated AA by the major rating agencies (refer to the Appendix for ratings definitions). It is our belief that a portfolio including A-rated corporate bonds would achieve better risk diversification and better yield potential without compromising a conservative credit bias essential to today’s treasury management functions.
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