“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 Angeles-based DoubleLine Capital LP, which oversees more than $50 billion, said Dec. 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 1.70 percent, as negotiations stalled between President Barack Obama and House Speaker John Boehner to avert mandatory tax increases and spending cuts. The rate increased two basis points, or 0.02 percentage point, to 1.72 percent as of 9:12 a.m. in New York.
S&P and Moody’s say they aren’t predicting yields.
“Ratings are really just a rank ordering of our opinion of relative credit worthiness based on our criteria,” Peter Rigby, a credit analyst at S&P, the New York-based unit of McGraw-Hill Cos., said Aug. 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 e-mail 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 Nov. 15 U.S. Securities and Exchange Commission report.
One reason for the divergence between bond performance and ratings is that investors with the most at stake may act before Moody’s and S&P.
“I don’t agree that markets don’t care about ratings,” Peter Palfrey, who helps oversee $182 billion at Loomis Sayles and Co. in Boston, said Dec. 11 in an interview. Changes are “largely priced into the market already.” Palfrey is a co- manager of the Natixis Loomis Sayles Core Plus Bond Fund, which has beaten 98 percent of its peers for the past five years, Bloomberg data show.