The downgrade itself is usually well anticipated in spread terms, but the index rebalancing is mechanical and concentrated. Investment grade indices drop the bond at month-end and high yield indices add it, and the handover typically comes with a price dislocation.
That dislocation has historically been a source of return: fallen angels tend to be the largest, highest-quality issuers in the high yield index, and they have outperformed the broader high yield market in the months after the forced selling clears.
Example: a $4 billion issuer is cut to BB plus. The bond trades from 92 to 86 over the rebalancing week, then recovers to 90 within two months as dedicated high yield buyers take it from constrained sellers.
Related: credit-rating, investment-grade, high-yield, rising-star, credit-cycle