A bond rating isn’t the only indicator of quality.

“The perception in the marketplace is a bond with a AAA rating is the crème de la crème,” says Patrick Bradley, a product specialist with the global fixed income team with Brandywine Global Investment Management in Philadelphia. He also co-manages the Renaissance Optimal Income Portfolio.

But that’s not necessarily the case, because rating agencies don’t always have all available information, he says.

“There is a tendency for the rating agencies to lag. French bonds were AAA-rated even as there were concerns that France was going to experience some issues in the management of its fiscal policy and its growth,” he says.

Read: Another worthless rating

“The U.S. lost its much-vaunted AAA rating because of the financial crisis last year with the raising of its debt ceiling, but bonds actually rallied. So there is more behind purchasing a security than simply looking at credit,” he adds.

Read: Are you at risk?

Bradley suggests investors do deeper analysis, and use the rating as one factor within that assessment.

“We’re looking at countries that have high real yields – the nominal interest rate less the inflation rate. We also do hard evaluation of a country’s cyclical position: we are looking at economic growth expectations and inflation policy; interest rates and [whether those] rates will rise or fall.”

Bradley also considers a country’s long-term structural factors like whether the country has a credible central bank focused on controlling inflation, as well as a forward-thinking fiscal policy.

Read: Understanding a bond fund’s risk

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I concur with Patrick Bradley’s view relating to value and meaning of ratings for bonds.

Insofar as the often pitched ratings as an indicator for the selection of a life insurer, the Canadian experience has proven that the glitter is hardly more than litter. One of the reasons for that is that life insurance is a long term consideration while ratings of life insurers are at best a photoshopped snap-shot of the past but not of the future.

From a statistical perspective, and taking the entirety of the historical sample into consideration, life insurance company ratings have proven to be slightly less reliable than a coin toss within a single year. …Something to consider before taking the risk of attempting to read the ratings tarot cards to recommend one life insurance carrier over another. If you are still thinking of reading the tarot cards, read the disclaimers that the ratings agencies are wise enough to place on their ratings for life insurance companies.

Thursday, September 27 @ 5:14 pm //////

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