Sovereign Ratings a Lagging Indicator, Stheeman Says

Sovereign-debt ratings are a lagging indicator, and their effect on government bonds can be overstated, Robert Stheeman, chief executive officer of the U.K.’s Debt Management Office said.

“The importance of ratings and their impact can potentially be exaggerated,” Stheeman said at the Bloomberg Sovereign Debt Conference hosted by Bloomberg Link in Frankfurt today. “Rating agencies tend to be lagging rather than leading indicators, and the market, especially in efficient government bond markets, if there is such a thing, is most likely to have discounted significant rating movements long before they’ve actually occurred.”

U.K. 10-year gilt yields have been in a range of 2.30 percent to 2.49 percent since March 15, the day after Fitch Ratings said the nation risked losing its AAA ranking. The yields fell to a record low 1.92 percent on Jan. 18 as investors sought refuge from Europe’s sovereign-debt crisis.

Italy’s government bonds have returned 12 percent this year for the best performance among 26 bond indexes tracked by Bloomberg and the European Federation of Financial Analysts Societies even after Standard & Poor’s lowered the nation’s rating on Jan. 13 by two steps to BBB+.

Treasury 10-year note yields dropped to a record low 1.67 percent a month after the decision of S&P to strip the U.S. of its AAA rating in August.

Fitch’s View

Fitch changed the outlook on Britain last week to “negative” from “stable,” indicating a “slightly greater” than 50 percent chance that the AAA rating will be reduced within two years. The ratings company cited a weak economic recovery, high debt levels and threats from Europe’s sovereign-debt crisis.

The unwinding of the Bank of England’s asset-purchase program, also known as quantitative easing, isn’t a concern for the London-based Debt Management Office, which sells debt securities on behalf of the U.K. Treasury, Stheeman said.

“When rates rise, it is perhaps a signal, not just that people are concerned about a QE unwind but on the contrary are much more focused on the fact that the economy itself might potentially be turning a corner,” he said.

To contact the reporters on this story: Lukanyo Mnyanda in Edinburgh at lmnyanda@bloomberg.net; Lucy Meakin in London at lmeakin1@bloomberg.net

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net

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