adminsafer or more risky.
Yields on sovereign securities moved in the opposite direction from what ratings suggested in 53 percent of the 32 upgrades, downgrades and changes in credit outlook, according to data compiled by Bloomberg.
That’s worse than the longer term average of 47 percent, based on more than 300 changes since 1974. This year, investors ignored 56 percent of Moody’s rating and outlook changes and 50 percent of those by S&P.
For national debt, following decisions of the arbiters of credit risk is less reliable than flipping a coin for determining borrowing costs. While the companies face legal proceedings and more regulation after contributing to the worst financial calamity since the Great Depression, politicians cite the grades as one reason for austerity when Europe is in recession and the Federal Reserve has cut its growth forecast.
“Policymakers should be more preoccupied with the market than with the ratings companies, because that’s where the real costs bear out,” Brett Wander, the chief investment officer for fixed income in San Francisco at Charles Schwab Investment Management Inc, which oversees about US$200 billion, said in a telephone interview December 14.
“Credit rating agencies historically lag the real economic fundamentals, whereas markets are ahead.”
Moody’s, which helped start the business of ranking companies by their ability to repay debt in 1909, has downgraded 6,4 government ratings for every upgrade this year in the US and Europe, the highest ratio since at least 2002, Bloomberg data show. S&P has cut 4,3 rankings for every increase.
Even so, European bonds are having their best year since 1998, returning 11,5 percent through December 14, according to the Bank of America Merrill Lynch Euro Government Index. The best bonds in the world were Greek securities, which gained 84 percent, and Portuguese notes, up 55 percent, according to indexes compiled by the European Federation of Financial Analyst Societies.
Yields on all government securities declined to a record low 1,36 percent on November 28, according to Bank of America Merrill Lynch index data going back to 1996. The bonds returned 4,5 percent this year.
“If ever there was proof positive that ratings were a lagging indicator, it’s certainly been true with the way the rating agencies have responded to” Europe’s three-year debt crisis, Bonnie Baha, the head of global developed credit at Los Angelesbased DoubleLine Capital LP, which oversees more than US$50 billion, said on December 12 in a telephone interview. The gap between Treasury yields and those of other bonds is more reliable, she said.
The yield on the 10-year Treasury note decreased eight basis points last week to 1,7 percent, as negotiations stalled between Barack Obama and House Speaker John Boehner to avert mandatory tax increases and spending cuts.
S&P and Moody’s say they aren’t predicting yields.
“Ratings are really just a rank ordering of our opinion of relative creditworthiness based on our criteria,” Peter Rigby, a credit analyst at S&P, the New York-based unit of McGrawHill Cos, said on August 16 in a telephone interview. “It’s neither an objective nor goal or intent to determine yields or prices. Obviously, investors do that using a whole host of information and different investors have their different valuation objectives.”
Eduardo Barker, a spokesman for Moody’s, declined to comment. Richard Cantor, the company’s chief credit officer, said in May in an email that “we have only one objective, which is to assign ratings that are indicative of the relative risk of default and losses”.
S&P, Moody’s and Fitch Ratings, a unit of Paris-based Fimalac SA, provided more than 99 percent of rankings of government, municipal, and sovereign debt and 96 percent of all outstanding grades last year, according to a November 15 US Securities and Exchange Commission report. — Bloomberg.
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