Fixed-income securities such as REIT bonds are called spread products because their yields are priced and quoted in terms of their spread over U.S. Treasury bonds with the same term, according to “The Strategic Bond Investor,”
a book by Tony Crescenzi. A bond's spread is determined
at the time of issuance, but changes—becomes greater (wider) or less (tighter)—during the term of the security. This is of relatively less concern for investors who buy bonds and hold them until maturity (buy and hold)
than it is for investors who actively trade bonds (total
return investors).
Many factors can influence bond spreads, including
interest rates, credit issues related to the issuer or its
industry and the supply and demand for bonds in the
fixed-income markets.
Generally, a bond perceived as risky will have a wider spread than a bond perceived as being less risky.
When bond spreads widen, the yield rises and the price of the bond decreases. When bond spreads tighten, the yield goes down and the price of the bond increases.
Besides buyers and sellers of bonds, another important party in the bond market is the ratings agencies:
Moody's Investors Service, Standard & Poor's and Fitch Inc. Investors often use the ratings issued by these firms to
inform the investment decision-making process. Even large institutions that perform their own exhaustive
analysis consult rating agency opinions to confirm their opinions and gain a sense of where the market is headed. The ratings definitions used by the ratings agencies are summarized below.
Summary of Debt Ratings
For REITs in the NAREIT Composite Index |
| REIT Debt Ratings |
| Agency |
# REITS |
Investment
Grade |
Below
Investment Grade |
| Fitch |
45 |
82.2% |
17.8% |
| Moody's |
69 |
65.2% |
34.8% |
| S&P |
60 |
83.3% |
16.7% |
| Corporate Debt Ratings |
| Agency |
|
Investment
Grade |
Below
Investment Grade |
| Fitch |
|
80% |
20% |
| Moody's |
|
60% |
40% |
| S&P |
|
44% |
56% |
Sources: REIT summary: the rating agencies, NAREIT;
Corporate debt summary: the rating agencies |
| REIT Debt Ratings to Other Sectors |
| Agency |
|
Investment
Grade |
Below
Investment Grade |
| Fitch |
|
83.3% |
16.7% |
| Corporate |
|
44% |
56% |
| Utilities |
|
79% |
21% |
| Sources: Standard & Poor's |
