James Carville, a former adviser to President Clinton, once said: “If there was reincarnation I used to think I'd like to go back to living as a President or a Pope – but now I've changed my mind. I would go back like the bond market – you can get everyone in line.” And, to the extent that the bond market listens to rating agencies, Carville could have said that he would like to reincarnate in one of those agencies. Or not?
The end of the year is propitious for the final balances and Bloomberg has calculated how the markets have reacted to the downgrades and promotions offered by Moody's and Standard & Poor's. Sovereign bond yields – this is the result – moved in the opposite direction to that suggested by credit rating changes in an average of 53% of cases (56% for Moody's and 50% for S&P).
This 53% is higher than the average 47% recorded in the years 1974 to 2011. In short, if you wanted to guess the change in returns, you would have been better off tossing a coin – heads or tails, with a 50% probability of getting it right – rather than to follow the advice of the agencies.
