Do these AAA / AA / A ratings actually change how much return we get?
like does lower rating = higher return always? trying to understand the relationship here
similar question, actually cause I have seen some A rated bonds with higher XIRR than another AA rated bonds. is that normal?
Hi, a pretty common question.
Ratings do influence returns.
Here’s the simple idea:
Higher the rating → lower the risk → typically lower the return
Lower the rating → higher the risk → typically higher the return
So,
- AAA bonds are seen as the safest, so they usually offer the lowest yields
- AA bonds offer slightly higher yields
- A or BBB+ bonds generally offer higher yields because the risk is considered higher
It’s a risk-return tradeoff built into the bond market.
Ratings don’t guarantee anything, they just reflect the rating agency’s view of the issuer’s ability to repay.
Adding one quick clarification to the above explaination
The “higher rating = lower return” pattern is common, but not always universal.
Sometimes you’ll see:
-
A-rated bond offering lower returns than an AA
-
Two AAA bonds with very different yields
-
A lower-rated bond offering only slightly higher return
This happens because yields depend on more than just ratings, such as:
-
market demand and liquidity
-
issuer’s current borrowing needs
-
bond structure
-
tenure
So ratings influence returns, but they’re not the only factor, which is why yield differences don’t always line up perfectly with rating levels.