A test of through-the-cycle ratings: Moody’s response to COVID-19

We study the performance of through-the-cycle (TTC) credit ratings during the COVID-19 shock using sentiment analysis of 24,178 Moody’s rating reports issued 2012–2024. We document three findings. First, report sentiment collapsed in March 2020 while average rating levels remained essentially unchanged. Second, sentiment Granger-causes subsequent downgrades, leading formal rating actions by 1–2 months in normal periods and by 3–4 months during the pandemic. Third, credit spreads closely tracked sentiment rather than the sticky TTC ratings, with sentiment’s explanatory power for spread variation rising from approximately 10% in “normal” years to 58% in 2020-2021. These patterns show that, when shock permanence is uncertain, TTC methodology delays rating adjustments and shifts timely credit-risk information into narrative commentary. The evidence suggests value in hybrid rating systems that preserve TTC ratings for regulatory capital purposes while disclosing supplementary point-in-time indicators to reduce information frictions.