When bond ratings slip, investors shrug

For bonds, a credit rating downgrade isn’t what it used to be. According to new research from Moody’s Investors Service, being dropped to junk status doesn’t affect bond prices as much these days.

In a new report, the rating agency said the impact of a rating downgrade from investment grade to speculative grade has diminished over the past decade.

The findings are based on a global study of nearly 700 so-called “fallen angels” — companies that were downgraded to junk status — between 2000 and 2020. Moody’s reported that, while these sorts of downgrades moved bond prices in the early 2000s, the effect has begun to fade in recent years.

“Bond prices have shown a smaller reaction to fallen angel downgrades since 2010,” said Colin Ellis, managing director, credit strategy, at Moody’s.

“Across a 20-year period, our analysis shows that rating downgrades do not appear to have led to a clear repricing pattern in financial markets,” he added.

The research comes on the heels of a spike in “fallen angels” due to the Covid-19 crisis. In 2020, there were 46 companies downgraded to speculative territory, which was almost triple the number in 2019.

Moody’s points to several possible reasons for the waning effect of downgrades, including changes to credit rating assessments that have reduced the need for institutional investors to rebalance their portfolios after a downgrade.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.