you are right, on an absolute scale, the rating and CDS spreads can vary. however, i think ratings are still useful on a relative scale (AA vs A vs BBB).
(I secretly use ratings too but I don’t post about it in a public place. Very uncool).
JoeyDVivre Wrote: ------------------------------------------------------- > Nah. As soon as you trade CDS on a name, the > rating is just a trailing (distant trailing) > indicator of its spread. Moody’s Market-Implied Ratings folks disagree. They’ve studied what happens when analyst rating and MIR differ by 3+ notches. In appx 1/3 of such cases, the analyst rating adjusts toward the MIR; 2/3 of the time the MIR adjusts toward the analyst rating. I believe this result holds for both bond- and cds-implied ratings. When events occur of course published ratings, which by design exhibit considerable hysteresis, trail market prices – and this is frequently the source of several spectacular counterexamples to the general finding above. But over the universe of ~7k rated and traded companies, credit markets usually overreact.
I don’t know that result, but it’s a strange way of measuring it anyway. We are just picking up the most extreme observations and checking them?
3 notches (e.g. from A2 to Baa2) isn’t particularly extreme – much of the banking sector is currently trading 6 or more notches south of published. (GS, e.g., is trading at Ba3: 9 notches off. ) Given the volatility in MIRs I think they view 1-2 notch differences as just noise, and not indicative of a real disagreement between market and agency. You can find many stable firms trading for years at 1 or 2 notch differentials to published rating. 3+ notch differences usually don’t last that long. (For the GS example above: what do you think will move more: analyst or market-implied rating?)
Yeah, the oh-so-dangerous hedge funds didn’t tank the damn market; it was all the big guys diving on to the bandwagon at the end of the day even though they knew market for that crap (mortgages to people who can’t afford a pizza) was bound to dive because they were petrified of a stupid article questioning why they weren’t in the market … love how one of the proposals for the “bailout” from the Dems is to pay off “underwater” mortgages instead of “paying off Wall Street”. I know the Repubs do some stupid things, but are the Dems really that stupid, or do they just think the rest of us are?