For decades, credit rating agencies have unintentionally provided bond investors with an almost guaranteed way to turn a profit: When the firms demote companies from investment-grade, many money managers are forced to sell, because they have mandates forbidding them from owning junk debt. Such sales typically happen fast, pushing prices below those for bonds with similar ratings—and people who face no such restrictions rush in to buy, aiming to benefit as the debt returns to equilibrium.
The Covid-19 pandemic slammed the brakes on the strategy, called fallen angel investing. As companies recovered from the economic shock of global lockdowns, balance sheets improved, leading to far more upgrades than downgrades. Bloomberg’s US fallen angels index is about a quarter the size it was in 2020, with fewer companies than at any point since it was introduced in 2005.