The global bond market disagreed with Moody’s Investors Service and Standard & Poor’s more often than not this year when the companies told investors that governments were becoming safer 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.
“Policy makers 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 $200 billion, said in a telephone interview Dec. 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 U.S. 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 Dec. 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 Nov. 28, according to Bank of America Merrill Lynch index data going back to 1996. The bonds returned 4.5 percent this year.