Last week we saw continued volatility in global stock markets. However, the more interesting story is that investors basically affirmed that they don’t really care about Moody’s credit ratings. After the market closed on Thursday, Moody’s came out with “big news” that they were downgrading 15 major global banks. Surprisingly, global stock markets were up slightly on Friday and borrowing costs (i.e. bond yields) on those banks remained unchanged. In the past, a credit downgrade would have been market moving news. However, that was before Moody’s along with S&P lost credibility when they completely missed the 2008 global credit crisis and were giving out AAA ratings to sub-prime debt months before the loans became (basically) worthless. Last August, S&P downgraded the U.S. Govt’s credit rating from AAA to AA. Instead of paying a steep penalty, investors have ignored the downgrade and borrowing costs (on a 10 year bond) for the U.S. have dropped from 2.5 to 1.6 percent.
This all begs the question; if investors don’t trust the ratings agencies then whom do they trust? And how are they measuring the potential default risk of different borrowers? Since those are rhetorical questions, I will move on.
In other news, our esteemed colleague, Robert Luna is becoming a regular on the Fox business channel. Click HERE to see today’s segment. Have a great week.