What’s the bottom line? Investment guidelines that impose a floor on credit quality only will be effective if high credit quality is an adequate substitute for diversification and precision.We argue that the current lineup of opportunities in corporate and sovereign markets put this proposition in doubt. In a world of fragile sovereign ratings, with developed market ratings in decline, we believe investors should, and probably will, rephrase their investment guidelines in terms of portfolio risk rather than individual credit risk.

Of course, this exercise has to take account of corporate debt’s lower liquidity and higher correlation with equity markets. Even with investment guidelines unchanged, we believe the continuing questions surrounding sovereign ratings will likely tilt more investors toward relatively greater corporate debt exposure.