The Making of Fallen Angels—and What QE and Credit Rating Agencies Have to Do with It

Acharya, Viral V.; Banerjee, Ryan N.; Crosignani, Matteo; Eisert, Tim; Spigt, Renée

Discussion Paper

The Making of Fallen Angels—and What QE and Credit Rating Agencies Have to Do with It

Abstract: Riskier firms typically borrow at higher rates than safer firms because investors require compensation for taking on more risk. However, since 2009 this relationship has been turned on its head in the massive BBB corporate bond market, with risky BBB-rated firms borrowing at lower rates than their safer BBB-rated peers. The resulting risk materialized in an unprecedented wave of “fallen angels” (or firms downgraded below the BBB investment-grade threshold) at the onset of the COVID-19 pandemic. In this post, based on a related Staff Report, we claim that this anomaly has been driven by a combination of factors: a boost in investor demand for investment-grade bonds associated with the Federal Reserve’s quantitative easing (QE) and sluggish adjustment of credit ratings for risky BBB issuers.

Keywords: corporate bond markets; investment-grade bonds; large-scale asset purchases; credit ratings;

JEL Classification: G3; G2;