That is usually not the case. The rating scales used by the agencies are very conservative. Distinctions between rating levels are often based on nuances. Any bond rated investment grade or better continues to have good margins of safety, even after a downgrade.
However, certain downgrades are more significant than others and should be viewed as red flags:
If any of these occurs, you might want to review whether you wish to continue owning that security.
My bonds are insured, or AAA, or government guaranteed. Won't that guarantee that principal remains safe?
No. What is guaranteed is that interest payments will be made on time and that principal will be redeemed in full at the bond's maturity. There is no connection between that guarantee and what happens to the price (or value) of bonds due to fluctuations in interest rates. Changes in interest rates affect all bonds, whether they are those of Fly-by-Night airlines or obligations of the U.S. government. If interest rates rise, the value of your bonds will decline. If interest rates decline, the value of your bonds will rise. Period. No exceptions.
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