Credit Quality De-Mystified

A very good read on fixed income (bond) mutual fund credit qualities… a little hard to believe it took Morningstar this long to update and publish credit quality ratings in this manner.

As the article points out, the previous system was based on simple averaging of credit qualities in the portfolio, assuming a linear relationship i n default rates. Well, default rates go up in a non-linear fashion, when credit quality or bond rating goes down. Therefore a simple averaging is a very misleading approach to the actual default rate potential there is in a given fixed income fund: