Legacy Credit Ratings Don’t Jive With Market Reality

In mid August, the bond section of the Charles Schwab brokerage Web site said a representative ten-year, single-A muni yielded 5.9%, and a ten-year, triple-A yielded 4.1%. But when you look at the actual listings, you’ll often find anomalies: Some ten-year single-A bonds yielded as little as 3.7%, while a few uninsured triple-A bonds (those supported by tax revenues or utility bills) paid up to 4.5%. Clearly, legacy credit ratings don’t jive with market price realities  but market price based credit ratings  do. For example, look at the bonds of then highly rated  Lehman Brothers and Bear Stearns  months before they imploded and the market had it right.  Bond-fund managers say they rely more on their own research to evaluate a bond’s price and yield, you should too and  you can trade smarter by taking  advantage of pricing inconsistencies.