Corporate Bonds Are About to See a Wave of Downgrades

There’s a crisis lurking in markets that many investors remain completely unaware of. While attention is focused on stock market levels, job hiring, and oil prices, one major market remains, as it often has been, overlooked by the majority of investors. And weakness in that market could set off a series of forced sales that could have a domino effect on markets and precipitate another financial crisis. That market is the bond market.

The bond market is one to which most investors hardly ever pay attention. Traditionally it has always been the domain of conservative investors looking for a guaranteed yield without taking on too much risk. Bond investing has never been seen as an avenue for rapid wealth accumulation like stocks, but rather as just one part of a diversified asset portfolio.

There’s just one problem with bond markets right now: the large number of near-junk status bonds. At least 58% of US corporate bonds are rated BBB, the lowest tranche before junk bond (BB and lower) grade. With rising interest rates and worsening economic conditions, there is a high likelihood that many of those bonds will be downgraded later this year.

Since many institutional investors such as financial institutions and pension funds are required to invest only in investment-grade bonds, bonds being downgraded to junk status would mean that those bondholders would have to sell their non-investment-grade bonds. That could unleash a vicious cycle of bond sales with numerous sellers but few buyers, dropping bond prices, spiking bond yields, and potentially freezing bond markets if no buyers can be found.

The possibility of this occurring puts the lie to bond investing as a conservative method of investing. We’re at the tail end of a multi-decade bull market for bonds and entering an era of rising interest rates that hasn’t been seen in decades. Thousands of bond traders will lose their shirts as they are unable to cope with the new realities of the market.

In contrast to bonds, gold is really the best asset for investors looking to protect and maintain their investments. As those who have invested in gold can attest, no asset does a better job maintaining its value in the face of economic turmoil and financial crisis than gold. And with gold IRAs it’s easier to invest in gold than ever. Investors can even roll over existing retirement assets from an IRA, 401(k), or 403(b) account. For those worried about protecting their assets from both a stock market crash and bond downgrades, there’s no reason not to invest in gold today.