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2011 Bond Ratings: Upgrades, Downgrades

(Bond rating story updated with more ratings news)
NEW YORK ( TheStreet) -- Corporate, municipal and sovereign bonds don't get the same attention that the equities market does, despite being a significantly larger market and a crucial source of funding for public and private sectors around the world.

But as the economic rebound remains uncertain, the safe and stable returns that bonds can offer render them a potentially good investment story in the opinion of many investors.

As with other securities, the bond market -- also referred to as the credit, debt or fixed-income market -- requires caution. Money can be lost on bonds, so staying on top of the trends in inflation -- which doesn't bode well for bonds -- and interest rates, and keeping an eye on major corporate events is crucial.

According to a Fitch Ratings report, U.S. corporate credit market trends should remain on track in 2011 compared with last year, with modest economic growth, improving operating profiles and good liquidity offsetting some still-weak macroeconomic factors. This is particularly notable when considering debt securities offered by corporations.

Still, "the recent sharp and sustained increase in a basket of commodity prices represents a growing source of concern for fixed-income investors," according to a report by Fitch analysts.

Protein processors, ethanol producers and airlines remain the most sensitive of the commodity-sensitive sectors, while beverage producers and auto suppliers continue to be the least sensitive of the commodity-sensitive sectors, the report said. At the same time, these types of companies appear to be better-positioned to pass on higher commodity costs to customers than during the 2008 commodity price spike, the Fitch analysts noted.

Municipal, or "muni," bonds, which are debt securities offered by cities, states and counties, should have significant upside potential this year. Fitch said the credit quality of states will remain strong and that most of them will continue to have ratings of 'AA' to 'AAA.' That said, it's possible that an above-average number of additional downgrades or negative rating outlook revisions could occur next year, Fitch cautioned.

The risk in sovereign bonds, or bonds offered by a country's government, vary depending on the country's development. Fitch noted that the contrast in economic and credit outlook between emerging markets and advanced economy sovereigns is becoming more pronounced, with emerging economies estimated to have growth at almost three times the rate of advanced economies and seen as having broadly improving public finances.

That said, on Feb. 7, UBS published a report cautioning that the safe-haven attributes of government bonds could be challenged in the coming decade. "We expect interest rates in advanced economies to rise amid structural deficits, growing debt burdens and the prospect of higher inflation," Kurt Reiman, head of thematic research for UBS Wealth Management Research Americas said in the report. "Erosion in the perceived credit quality of government bonds will challenge the notion that sovereign debt is a risk-free asset, leading to an increase in risk premiums."

Reiman expects Treasury securities, the sovereign debt of Japan and certain Eurozone countries, and their respective currencies, to come under growing pressure in the decade ahead -- though the possibility of actual sovereign defaults remain remote for most countries.

The ability of corporations, municipalities or countries to meet their debt obligations and the risk associated with their debt offerings are graded using credit ratings. For instance, those that receive credit ratings in the range of Aaa to Baa3 from Moody's are considered to be investment grade, while those that receive assessments in the range of Ba1 to C from the rating agency are considered to be high-yield, non-investment grade or "junk." Ratings definitions for Moody's and Standard & Poor's have been provided in the following pages. Fitch Ratings and S&P use the same ratings scale.

To stay on top of the positives and negatives of bond issuers and bond offerings, read on for the latest credit ratings upgrades, downgrades and statuses ...

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