Bond Rating Agencies
Candlefocus EditorThe three most prominent bond rating agencies in the United States are Standard & Poor’s (S&P), Moody’s and Fitch Ratings. Bond ratings issued by these agencies range from AAA, the highest possible rating, to D, which indicates a bond in default. The analysis offered by the bond rating agencies is used to make critical decisions about how to allocate capital and manage investments in global markets. The information can help investors to save research costs and identify appropriate investment opportunities.
In the 21st century, the bond rating agencies faced heavy criticism for their flawed ratings of mortgage-backed securities. As the subprime mortgage market exploded in the US, a large proportion of these products were assigned AAA ratings. This occurred despite their higher risk and caused a global ripple effect when millions of borrowers defaulted on their mortgages, leading to the financial crisis of 2008. The discrepancy in ratings revealed the limitation of the rating agencies to correctly measure the risk of complex securities and their issuers.
After this scandal, the role of bond rating agencies became more tightly regulated and the criteria for ratings were tightened. Despite this, the agencies still remain an essential part of the financial system, providing critical insight into creditworthiness. For investors, a trusted bond rating agency is a reliable source of information to inform their decisions and help them manage their investments effectively.