bond rating agencies are companies that assess the creditworthiness of both debt securities and their issuers these agencies publish the ratings used by investment professionals to determine the likelihood that the debt will be repaid 
understanding bond rating agenciesthe three primary bond rating agencies in the u s are standard poor s global ratings moody s and fitch ratings each uses a unique letter based rating system to quickly convey to investors whether a bond carries a low or high default risk and whether the issuer is financially stable standard poor s highest rating is aaa and a bond is no longer considered investment grade if it falls to bb status the lowest rating d indicates that the bond is in default that means the issuer is delinquent in making interest payments and principal repayments to its bondholders 1in general moody s assigns bond credit ratings of aaa aa a baa ba b caa ca c standard poor s and fitch assign bond credit ratings of aaa aa a bbb bb b ccc cc c and d with the latter denoting a bond issuer in default 231the agencies rate bonds at the time they are issued they periodically reevaluate bonds and their issuers to see if they should change the ratings bond ratings are important because they affect the interest rates that companies and government agencies pay on their issued bonds the top three bond rating agencies are private firms that rate corporate and municipal bonds based on the associated degree of risk they sell the ratings for publication in the financial press and daily newspapers other bond rating agencies in the united states include kroll bond rating agency kbra dun bradstreet corporation and egan jones ratings ejr company bond rating agency methodologiesto give credit ratings to organizations like governments businesses and financial instruments rating agencies utilize a variety of approaches the approaches and methodologies may include but are not limited to in addition to the methodologies above rating agencies may apply variations across each rating agency for example various credit ratings for the same company may vary across rating agencies due to the varying weights of these methodologies in addition rating agencies may have a variety of specialties and areas of interest some agencies may have areas of expertise in particular industries or classes of financial instruments which can cause differences in the breadth of industry research and the comprehension of risks unique to each sector rating agency regulatory frameworkrating agencies are subject to different regulatory frameworks at the top the securities and exchange commission sec is the principal regulatory body in charge of regulating rating agencies in the united states the sec has the authority to register regulate and oversee nationally recognized statistical rating organizations nrsros which are the rating agencies recognized by the sec as credible and influential in the u s market 56the u s congress approved the credit rating agency reform act crara in 2006 in reaction to the financial crisis of 2008 78the sec has established a code of conduct that nrsros must follow the code of conduct places a strong emphasis on the necessity for independence avoiding conflicts of interest and giving ratings that are fair and truthful additionally it requires that techniques rating results and any conflicts of interest be disclosed 5last in addition to local laws there may be international regulatory frameworks that apply to rating agencies for instance the international organization of securities commissions iosco has produced a code of conduct fundamentals for credit rating agencies that outlines international standards and principles for the operations of rating agencies 9last updated in 2021 a study by the federal reserve found that a data set of 2 000 credit ratings strongly indicated there was no influence by the rating agency s conflict of interest 10benefits of bond rating agenciesalthough bond rating agencies were heavily criticized early in the 21st century they continue to perform valuable functions for investors a variety of exchange traded funds etfs depend on bond ratings for their purchases for example an investment grade bond etf will buy or sell bonds depending on the ratings that they receive from the bond rating agencies in this way the agencies act similarly to fund managers charged with investing in securities of sufficient quality 11the bond rating agencies provide useful information to the markets however they are not responsible for the often irrational ways that investors and funds respond to that information even managed mutual funds frequently have rules that require them to sell bonds that fall below a specific credit rating a rating downgrade can cause a downward spiral of forced selling creating bargains for investors in fallen angel bonds criticism of bond rating agenciessince the 2008 credit crisis rating agencies have been criticized for not identifying all of the risks that could impact a security s creditworthiness in particular they were blamed for giving high credit ratings to mortgage backed securities mbs that turned out to be high risk investments 11investors continue to be concerned about possible conflicts of interest bond issuers pay the agencies for the service of providing ratings and no one wants to pay for a low rating because of these and other shortcomings ratings should not be the only factor investors rely on when assessing the risk of a particular bond investment on the other hand bond rating agencies have also been criticized for causing financial losses by making dubious rating downgrades most famously s p downgraded the u s federal government s credit rating from aaa to aa during the 2011 debt ceiling crisis 12in august 2023 fitch downgraded the u s government s rating from aaa to aa due to the expected fiscal deterioration over the next three years a high and growing general government debt burden and the erosion of governance relative to aa and aaa rated peers over the last two decades that has manifested in repeated debt limit standoffs and last minute resolutions 13in december of 2023 moody s also lowered its outlook on the u s credit rating to negative from stable citing looming fiscal deficits and rising debt service 14in point of fact the federal reserve can always print more money to pay interest furthermore the u s government showed no signs of defaulting during the following decade nonetheless stock prices experienced a significant correction in 2011 some innocent companies ended up paying higher interest on their debts however the market showed its lack of confidence in s p s downgrade by sending u s treasury bond prices higher 15the relatively discrete way in which the agencies rate bonds also generally makes market volatility unnecessarily high the most extreme case occurs when the agencies downgrade a nation s debt from investment grade to junk status a more continuous system would give markets more time to adjust 