BlueSky Thinking Summary

It has been more than a century since investors in corporate bonds had limited information and therefore found it very difficult to assess bond safety.

What altered this was the innovation brought by John Moody when, in 1909, he began letter-grade bond rating, thus bringing simplicity to the complexities in financial interpretable ratings.

The latest research by Carola Frydman and colleagues digs deep into just how the ratings transformed the financial markets in most aspects.

In the research, an analysis of more than 500 bonds, both pre- and post-rating periods, revealed that the ratings issued by Moody's had a sweeping effect on how the market behaved: it reduced trading costs and encouraged the involvement of small investors.

Rating disappointments boosted yields of bonds by 3-5%, while bid-ask spreads went down, thus depicting improved liquidity in the market.

This historical perspective shows the importance of rating systems that are independent, transparent, and simplified within financial markets.

With the emergence of modern challenges in financial markets, if not for the sake of market efficiency then definitely for investor confidence, comes the pressing need for credible, simplified ratings—especially in new areas like ESG.

How will evolving landscapes of financial ratings set the course for your investment strategies?