Jan 25, 2005


Lehman Brother's apparently plans to alter the way it composes its bond index to prevent GM from being excluded by anything so trite as an S&P junk rating.

GM accounts for some 2.25 per cent of the credit index, with $45.5bn of corporate debt. But on Monday Lehman said that, as of July 1, it would also consider ratings from a third credit agency, Fitch Ratings, when deciding which companies to include in its Credit Index. This means even if S&P eventually lowers GM's credit ratings to junk - as many investors expect it will - the automaker will remain in the index as long as the other two ratings agencies continue to consider it "investment-grade".

Maybe it will have a positive effect by allowing the index spread to widen gradually without forced selling when the downgrade occurs but it is hard to have a good feeling about this. There is also some value to having the three ratings companies but again if I owned an investment grade fund I would prefer that a junk rating by any of the three agencies would lead to exclusion. If you buy an investment grade bond fund my guess is that you are interested in security and not return. This decision will simply raise the risk level of available options.

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