Bangkok--14 Dec--Standard & Poor's
Standard & Poor's Ratings Services said today that market participants relying on price signals from the bond and credit default swap (CDS) markets for credit analysis might get a limited view of credit risk. The article, "The Wishes Of Crowds: Do Credit Spreads Measure Credit Risk?," states that while market price data contain a wealth of information that can shed light on credit quality, credit market dynamics are far more complicated than a simple price or bond spread might suggest.
"Unlike fundamental credit analysis, market prices provide neither diagnostic capabilities nor insights into the reasons that differentiate one company's credit standing from another's," said Standard & Poor's credit analyst Peter Rigby. "As important, securities pricing data do not indicate why a company's creditworthiness is strong or weak."
Markets capture investors' emotions with great speed and efficiency and, consequently, can overreact to headlines, creating excessive volatility. Moreover, a great deal of evidence indicates that securities pricing is vulnerable to market illiquidity, unreliable information, asymmetrical information, investor herding, and differing investing and trading strategies.
On any given day, the number of traded bonds and CDS contracts--less than 3,000 names daily--represents only a fraction of the universe of rated securities covered by credit analysts such as those at Standard & Poor's. Globally, there currently exist more than 300,000 corporate bonds, about 1.3 million U.S. municipal bonds, and more than 117,000 structured finance bonds. So it should surprise few that, as experience has shown, investors who use market-based indicators and prices to the exclusion of fundamental credit analysis do so at the risk of mispricing their investment decisions.
In addition to the commentary, please see the interview on CreditMatters TV, dated Dec. 13, 2010 or by clicking Here.
The report is available to RatingsDirect subscribers on the Global Credit Portal at www.globalcreditportal.com and RatingsDirect subscribers at www.ratingsdirect.com. If you are not a RatingsDirect subscriber, you may purchase a copy of the report by calling (1) 212-438-7280 or sending an e-mail to
[email protected]. Ratings information can also be found on Standard & Poor's public Web site by using the Ratings search box located in the left column at www.standardandpoors.com. Members of the media may request a copy of this report by contacting the media representative provided.
Media Contact:
Jeff Sexton, New York (1) 212-438-3448,
[email protected]
Analyst Contact:
Peter Rigby, New York (1) 212-438-2085