Related Topics
Interest Rates , Stocks , Trading
     

There Must Be an Angel (Playing with The Chart, Yeah)

Everything is heavenly, as credit rating agencies screech into a U-turn.

by Murray Gunn
Updated: August 12, 2021

"Who would want to be a credit rating analyst? It seems that credit rating agencies can't do right for wrong and are always being criticized for either being late or early. Before and during the so-called Great Financial Crisis of 2008, rating agencies such as Moody's, S&P and Fitch, stuck with their rose-tinted view on the outlook for corporate and mortgage debt despite flashing red signals of a debt bubble, only downgrading swathes of bond issuers after it burst."

Join Club EWI to continue reading.

Unlock Now with a Free Account

Already have an account? Login Here

Create a free account and join Club EWI. We’ve helped over ½ million traders and investors learn to use Elliott waves. You get:

  • Full access to Elliott Wave Principle — Key to Market Behavior
  • Exclusive articles and interviews with our analysts
  • Invitations to access our premium analysis

Everything is heavenly, as credit rating agencies screech into a U-turn.

Who would want to be a credit rating analyst? It seems that credit rating agencies can't do right for wrong and are always being criticized for either being late or early. Before and during the so-called Great Financial Crisis of 2008, rating agencies such as Moody's, S&P and Fitch, stuck with their rose-tinted view on the outlook for corporate and mortgage debt despite flashing red signals of a debt bubble, only downgrading swathes of bond issuers after it burst.

Fast forward to March 2020 and, perhaps stung by the mauling they got back then, agencies were very quick to downgrade the credit rating of bond issuers as the stock market crashed. During March and April 2020, the credit rating on $1 trillion of U.S. investment grade corporate debt was downgraded.

Now, though, with the stock market back at all-time highs, corporate debt is being upgraded. According to Bank of America, $361 billion of higher-rated, investment grade bonds have been upgraded in the past two months alone. Citigroup predicts that $200 billion of junk bonds will be upgraded to investment grade by the end of 2022. Rating agencies are citing more manageable debt burdens on account of the economic rebound as the main reason for upgrades. The fact that the Federal Reserve has essentially underwritten the corporate bond market probably helps too.

But the agencies are merely following the market. The chart below shows the yield spread between A-rated and BBB-rated bonds. This is the lowest rated investment grade yield relative to the highest rated junk yield and can be used as a gauge of "fallen (or rising) angels," when investment grade issuers are downgraded to junk (or vice versa). It peaked out in April 2020 and has been declining since, so the ratings agencies are just catching up with market.

The record pace of ratings upgrades is a reflection of just how complacent sentiment has become. The majority of the crowd is firmly in the "don't worry, be happy" camp and hardly anybody foresees problems with corporate debt. But, as the chart shows, the yield spread between junk and investment grade is the narrowest it has been on this measurement since 2008. That doesn't mean it can't get narrower but, from an historical risk-reward perspective, there's probably a good chance that the credit ratings agencies are going to end up falling from grace once again.

210716-MG-Insight-Chart


Investing “for the long haul”?

That’s what financial advisors say is the best way to build wealth.

But timing still matters. A lot.

Back in 2008, lots of people had to postpone retirement when stocks crashed. And in 2009, they were too scared to go back in – just as the stock market was starting its historic bull run.

The Elliott wave model helps you time these big-picture moments. Right now, our flagship Financial Forecast Service updates you on key markets.

Here’s how to dive in right now.

Bitcoin’s All-Time High Foretold Before U.S. ETF Launch

On Oct. 20, the financial media said the catalyst for Bitcoin' rise to a new all-time high was the launch of a new U.S. exchange-traded fund. However, learn why Bitcoin's continued climb was in the cards well beforehand.

Energy ETFs: The Top Pick of Traders and... Robots Everywhere!

Oil prices are soaring and the world's biggest oil ETF, the USO, hit a 1-year high on October 20. Now, energy markets have won the hearts of traders and... robots alike! But before AI "bet big" on energy, Elliott wave analysis set the stage for USO's advance -- two months ago!

Commodity ETFs: The "Spice" of Life for Commodity Traders in 2021

After a four-month sideways trend, the Invesco Commodity Index ETF shot up in September on the way to its highest level since late 2014. See the chart and forecast that anticipated the big move.