Bond buyers place more weight on Moody’s Investors Service ratings than on Standard & Poor’s ratings, according to a recent Loop Capital Markets study.
Loop Capital also looked at bonds with a rating from only one of the two rating firms. The firm found that missing a Moody’s rating had more than twice the impact on what the market would demand for yield as did missing a rating from S&P.
Loop Capital Markets examined 99,444 trades completed this year in its study. It created a multiple regression model with Moody’s and Standard & Poor’s letter ratings converted into numbers as independent variables. It also included the return on the S&P 500, a measure of volatility, coupon size, years to worst yield, and years to worst squared as independent interval variables. Finally, whether or not the bond was missing either a Moody’s or S&P rating was included as a categorical independent variable.
The dependent variable was the trading spread relative to Municipal Market Data’s triple-A scale.
The unstandardized coefficient for the Moody’s rating was 16.77 whereas for the Standard & Poor’s rating it was 10.90. In other words, for each one-notch decrease in the Moody’s rating there was an additional 16.77 basis point increase in the spread. The figures indicate that a one-notch shift from Moody’s rating has 54% more impact than a one-notch shift from S&P.
The coefficient for missing Moody’s rating is 13.61 as compared with a coefficient for missing S&P rating of 5.66. The statistics indicate that missing a Moody’s rating, with all other factors held constant, has 140% more impact on the spread than missing a S&P rating.
The “p” values for these four independent variables are all below .0001. In other words, the statistical model says there is less than a one in 10,000 chance that these variables do not impact the dependent variable. The adjusted “R” square for the model is 0.66.
“It’s better for issuers to be rated by both rating agencies, but if you’re only going to have one you’re better with Moody’s,” said Chris Mier, chief strategist for Loop Capital Markets.
“We’re not trying to impugn S&P. … This general perception is already found in the marketplace. … The question for [research associate Nick Larson] and I was if it holds up to statistical scrutiny. … And the second thing was to see if these differences are large or small.”
Loop is doing this study in part because the muni market hasn’t had much statistical analysis, Mier said. “We feel it’s important to bring a stronger quantitative edge to studying the market.”
Asked to comment on the study, Moody’s spokesman David Jacobson said, “This gets into the market pricing aspect, which is beyond what we cover or discuss, so we’ll have to pass on this.”
“We have not had the opportunity to review the full research, so we cannot comment on it,” said S&P spokesman Olayinka Fadahunsi.