Alroy Commentary - Change in Sovereign Credit Ratings and Impacts to Bond and Stock Markets?
Investors pay a lot of attention to change in sovereign credit ratings. Rating agency studies a country and its economy and publishes the rating and the ratings change over time. Does change of rating matter?
Changes in sovereign credit ratings can help to reduce the financing costs (As investors are more willing to borrow money to country with higher rating), especially for those countries who upgrade to investment grade status. It is because expectation of market changes and encouraging more capital inflow. That’s mean the change really help the economy. Interesting, reactions of negative announcement is more significant than the positive announcement.
If a rating agency downgrades the rating in your country and you sell the securities on hand immediately, you cannot be benefited from your action normally. According to the historical data, market reacts to the change prior to the event. Some “first movers” already take actions before the change. Some findings point out countries which are less developed, more corrupt and have weaker law enforcement, have more pre-downgrade actions. So, it is difficult for you to make extra return from the change.
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