Fallen Angels and Rising Stars
A fallen angel is a bond downgraded from investment grade (BBB− or above) to high yield. A rising star is the opposite: a high-yield bond upgraded to investment grade. Both can see forced buying or selling by funds with rating limits.
The line between investment grade and high yield is one of the most important in bond markets. When a company crosses it — downward as a fallen angel or upward as a rising star — its bonds can move sharply, not only because its finances changed but because many funds are only allowed to hold one side of the line. This entry explains the two terms, why the boundary matters, and what traders watch.
- Category
- Bonds and Interest Rates
- Reading time
- 4 min
- Also called
- Fallen angel, Rising star, Fallen angel bond
- Updated
Fallen angels and rising stars in plain words
Investment-grade bonds are rated BBB/Baa or above and are believed to have a lower default risk.1 High-yield bonds are rated BB/Ba or below and must pay higher yields.2 See Credit Spread.
A company downgraded across that line becomes a fallen angel. One upgraded into investment grade becomes a rising star. Because many investors can only hold investment-grade bonds, crossing the line can trigger forced selling or new demand. See Default Risk.
How the boundary works, step by step
Know the line
BBB−/Baa3 is the lowest investment-grade rating.
Watch rating outlooks
“Negative outlook” at BBB− often precedes a fall.
Expect forced flows
Funds with investment-grade mandates may have to sell fallen angels.
Watch spreads
Spreads often widen before and around a downgrade.
Look for overshoots
Forced selling can push prices below fair value.
Rising stars
Upgrades can bring new buyers and tighter spreads.
Worked examples
Example 1 — A fallen angel
DowngradeA company rated BBB− is downgraded to BB+. Its 7-year bonds fall from 98 to 91.
| Price change | ≈ −7% |
| Cause | Weaker credit plus forced selling |
Crossing the line can move prices more than the rating change alone suggests.
Example 2 — The rebound
RecoveryMonths after the downgrade, forced selling ends and the bonds recover to 95.
| Gain from the low | ≈ +4.4% |
Some investors buy fallen angels after the forced selling, though recovery is not guaranteed.
Example 3 — A rising star
UpgradeA BB+ company reduces debt and is upgraded to BBB−.
| Investor base | Wider |
| Borrowing cost | Lower |
An upgrade can lower the company’s yields as new buyers arrive.
Fallen angels vs. rising stars
| Aspect | Fallen angel | Rising star |
|---|---|---|
| Rating move | Investment grade → high yield | High yield → investment grade |
| Typical flows | Forced selling | New demand |
| Spread effect | Widens | Tightens |
| Opportunity | Possible overshoot to buy | Gains before the upgrade |
Why investors watch these moves
Credit risk
Rating changes reflect changing default risk.
Price dislocations
Forced flows can create opportunities.
Portfolio rules
Mandates may require selling after downgrades.
Market stress
Waves of fallen angels often come in recessions. See Recession.
Advantages and disadvantages
Advantages
- Clear, observable events.
- Forced flows can create pricing opportunities.
- Ratings outlooks give early warnings.
Disadvantages
- Downgrades can continue further.
- Forced selling can be severe and lasting.
- Ratings can lag market reality.
Going deeper
Read as far as you need. Each level builds on the one before it.
Ratings are opinions
Beginner
Ratings are agencies’ assessments of default risk. Markets often move before or after them.
Split ratings
Intermediate
Agencies can disagree. Many index rules use the middle or lower of several ratings, so one agency’s downgrade may or may not cross the line.
Market size effects
Advanced
Large companies falling into high yield can be big relative to the high-yield market, which must absorb the new supply.
Common mistakes
Buying every fallen angel
Some keep falling or default.
Ignoring outlooks
Negative outlooks at BBB− are warnings.
Relying only on ratings
Check finances and spreads.
Forgetting liquidity
Forced selling can make bonds hard to trade.
Check your understanding
Test yourself before moving on. Each answer comes with an explanation.
Key points to remember
- Fallen angel: downgraded from investment grade to high yield.
- Rising star: upgraded from high yield to investment grade.
- The BBB−/Baa3 line matters because of fund rules.
- Forced flows can overshoot fair value.
- Ratings and spreads both signal credit risk.
Frequently asked questions
Why are fallen angels interesting to investors?
What happens to a rising star’s bonds?
Is BB+ junk?
Further learning
- Credit Spread
How credit risk is priced.
- Default Risk
What ratings try to measure.
- Recession
When downgrades cluster.
- Yield to Maturity
How bond returns are measured.
Sources
This article is written in our own words. The sources below support the specific facts, rules and figures marked with a number in the text. Links open the original publisher’s page.
- Investor.gov (SEC). Investment-Grade Bond (glossary) (opens in a new tab) Checked .
- Investor.gov (SEC). High-Yield Bond or Junk Bond (glossary) (opens in a new tab) Checked .
Educational content, not financial advice. Examples use hypothetical prices and simplified costs; actual fees, margin rules and regulations vary by broker, market and country. We are not affiliated with any publisher linked above. Last reviewed . Report an error or request a source credit.