Credit migration risk

Borrowings - securities - bonds - credit ratings - volatility.

Credit migration risk is the risk of adverse effects resulting from a change in a credit rating.

Sometimes abbreviated to migration risk.

Managing migration risk in ultra short duration bond funds (USBFs)

"Credit migration risk refers to the risk of a change in credit rating and, given the low default probabilities for investment-grade credit, is considered more important [than default risk] when managing overall volatility in a USBF.

Aside from systemic risk, the risk of downgrade is one of the main sources of potential credit volatility.

Key for the treasurer is the focus on the possibility of downgrades that have the potential to introduce volatility, rather than upgrades to credit quality.

Managing volatility from migration risk, or other sources, is essential in an USBF, which is why many funds have average maturities of less than six months...

... as we move down the credit-rating spectrum, typically the probability of credit migration increases and with this, so too the probability of increased volatility.

This should be managed by having [only] small exposures to lower-quality credit and to individual lower-quality issuers."

Ultra Short Duration Bond Funds: The importance of credit - ACT Knowledge Hub.

See also

• Corporate credit ratings: a quick guide
• Credit
• Credit rating
• Credit Quality Step
• Credit rating agency
• Credit risk
• Downgrade
• Duration
• Investment grade
• Issuer
• Maturity
• Migration
• Systemic risk
• Toxic
• Ultra short duration bond fund (USBF)
• Upgrade
• Volatility

Other resource

Ultra Short Duration Bond Funds: The importance of credit - ACT Knowledge Hub