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Looking for Top-Tier Bonds? Investors Have Fewer Choices

With long-term U.S. debt being knocked out of the elite triple-A credit club, investors’ top-tier fixed income choices have dwindled yet again.

In 1995, 30 U.S.-domiciled companies earned the triple-A badge, a number that’s now been slashed to four.

Earlier this week, Standard & Poor’s affirmed the top ratings for the companies: Automatic Data Processing , Exxon Mobil, Johnson & Johnson and Microsoft, as well as double-A plus ratings for W.W. Grainger and General Electric.

For investors looking to stay in top-tier credit, their options are few and far between, said George Bory, chief credit strategist at UBS. Because high-credit names issue little debt, there’s less available for investors to buy.

For instance, demand for Exxon Mobil's 30-year bond due 2021 is so fierce, the bond is trading nearly 50 percent above face value, and yielding five percentage points less than when it was issued.

“The market is repricing risk,” Bory said in an interview Monday. “If you look at the index for high-quality issuers Double-A and above, yields are at all-time lows.”

Yields are at all-time lows even farther down the credit spectrum as well. Moody’s Investor Service charts the average yields for Baa-rated credits, its lowest rung on the investment-grade ladder. At close on August 8th, these highest-of-the-low-risk credits were yielding an average of 5.40 percent, the lowest the index touched since May 1966.

This is as much a search for yield as it is refuge from tumbling equities, according to John Lonski, senior economist at Moody’s.

“Money is flowing into higher-yield corporate bonds, putting substantially more money in Baa and mid-level investment-grade debt,” Lonski said.

Certainly at the very top of the ratings ladder, the difference between AAA and AA isn’t a big deal to investors.

For General Electric , the conglomerate had held the prestigious credit rating for more than 50 years but was cut by a notch when S&P said the recession was hurting its financial arm, GE Capital. But when GE was downgraded in March 2009, its borrowing costs actually decreased briefly.

Downgrades can also be event-related. Pfizer’s credit was cut two notches to double-A in 2009 as it stacked up some $22.5 billion in debt to finance its $68 billion purchase of Wyeth.

Not even legendary investor Warren Buffett is immune from the ratings threat. His Berkshire Hathaway lost one notch from its triple-A rating in early 2010 on concerns its liquidity would be crimped by its acquisition of Burlington Northern Santa Fe.

Buffett spoke out to CNBC against the downgrade of America, saying U.S. debt was “still Triple A”—comments made just hours before Standard & Poor’s placed Berkshire’s double-A plus rating on negative watch.

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