Bonds are far more sensitive to credit (or default) risk than money markets because the timespan of the debt is so much longer and bond markets are highly segmented in terms of issuer credit quality.  But it isn’t too difficult to classify bonds specifically for credit-risk.

Unlike shares, which are an extremely vague investment proposition - i.e. you ‘share in the profits of a business’ - the bond investment proposition is pretty clear. It is a contract to pay a fixed amount of cash at set dates. And as long as the issuer has assets which can be liquidated into cash, bondholders can be confident of receiving their returns because they are senior creditors with strong legal claim to an issuer’s assets in the event of default.

Given this, it is relatively easy for analysts to look at the issuer's financial situation and determine the default risk which an investor/creditor is taking on - that is, the risk of the issuer (the debtor) not meeting their obligations in terms of the payment of coupons and/or principal.

There are credit rating agencies which specialise in this rating process - the main ones being Moody's, Standard & Poor's & Fitch - and they publish regular tables to classify bond issuers. The service is pretty comprehensive for bonds issued in the major currencies (for both domestic and international markets).

Sovereign governments are always the lowest credit risk when issuing in their domestic currency as they can never default on cash payments - they don't technically need any revenue to pay debts because they can always print domestic currency.

Supranational institutions are effectively guaranteed by major sovereign powers, so are also treated as being effectively default-free. All other issuers are risk-rated relative to them.

Issuers will move up and down the ratings scale in response to changes in their ability to service and repay outstanding debts. A ratings downgrade will cause a fall in market price and rise in yield on any outstanding bond issues.

The difference between the yield (return) of a lower rated bond and a AAA government bond is called the yield spread. It represents the extra reward investors get for taking on the higher risk investments (in much the same way that the equity risk premium indicates the extra reward investors get for holding shares as against government bonds).

Some investors will choose to buy lower rated paper, accepting the greater risk in search of the higher returns. These tend to be the 'buy and hold' portfolios locking-in a fixed return for a fixed time-period. They are not so concerned by changing yield/price caused by changes in the credit risk premium, as long as the borrower can service and ultimately repay the debt.

Portfolios which are actively managed tend to focus on the most liquid issues - and these happen to be the big AAA rated government markets. Traders need the large size, high volume (i.e.most liquid) markets, and they don't want credit quality concerns to get in the way of trading strategies which try to increase returns by using price changes caused by fluctuating interest rates. It is investment risk which traders want to be exposed to, not credit risk.

Both active and passive portfolio management focuses on strategies to maximise investment risk and returns within a chosen credit risk market segment.