Markets disagree with credit rating companies

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Do bond ratings really serve a purpose?

Still smarting from the controversy over all the AAA ratings of highly risky credit products, credit rating companies will uniformly argue that their single objective is to deliver a measure of creditworthiness. Credit ratings are not intended to be an investment aid, but the market often reacts to news of credit rating changes, especially when it comes to sovereign debt.

A Bloomberg study shows that "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.That's worse than the longer-term average of 47 percent, based on more than 300 changes since 1974."

The conclusion suggests that the market increasingly tends to see a credit rating change as confirmation of something it already knows. If some debt is upgraded, the market may take that as confirmation of a sense of rising creditworthiness, hence, the market may sell on the news, the opposite of what one might expect.

In many cases, a change in rating is a non-event. Perhaps that's how it should be.

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