Salient to Investors:
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 in 2013, versus the longer-term average of 47 percent of over 300 changes since 1974.
The IMF reported in January 2012 that prices of credit derivatives moved in the expected direction to for Moody’s rating changes 45 percent of the time for developed countries and 51 percent for emerging economies – 67 percent and 63 percent for outlook changes.
Brett Wander at Charles Schwab Investment Mgmt said credit-rating agencies historically lag the real economic fundamentals, whereas markets are ahead.
Moody’s has downgraded 6.4 government ratings for every upgrade in 2013 in the U.S. and Europe, the highest ratio since at least 2002, while S&P has cut 4.3 rankings for every increase.
Bonnie Baha at DoubleLine Capital said that ratings are a lagging indicator – the gap between Treasury yields and those of other bonds is more reliable. Peter Palfrey at Loomis Sayles said markets do care about ratings, though changes are largely priced into the market already. Jason Brady at Thornburg Investment Mgmt said central banks’ buying unprecedented amounts of government securities is also driving the divergence between ratings and bond performance.
European bonds are having their best year since 1998, returning 11.5 percent through Dec. 14 – Greek bonds topped with a gain of 84 percent. Europe’s economy is forecast to shrink 0.14 percent in 2012 and expand 0.4 percent in 2013.
JPMorgan Chase said the Fed will absorb 90 percent of net new dollar-denominated fixed-income assets in 2013.
Eurostat says European government debt rose to 90 percent of GDP in Q2 from 66 percent in December 2007. The CBO expects US debt to go over 70 percent by the end of 2012 versus 36 percent at the end of 2007. James Sarni at Payden & Rygel said investors don’t care about another U.S. downgrade. Warren Buffett says the US should be quadruple-A rated.
S&P lowered its outlook on the UK to negative from stable due to the weak economy.
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