This may help drive the reversal process. However, fundamentally, the strong performance after entering the high-yield segment (shown in the above chart) seems to be driven by the cheapness of the credit. Fallen angels have a strong value factor tilt.
But there are risks to consider. Not all fallen angel bonds remain in the BB rated category, as some may continue to descend to a single B or even default. In fact, in the first two years after entering the high yield universe, fallen angels have a higher risk of defaulting than originally issued high yield bonds. A focus on higher quality rated fallen angels and broad diversification across sectors but also issuers, for example through the implementation of an issuer cap, could help a multi-asset manager mitigate these risks.
Why are fallen angel bonds particularly interesting today though? A volatile start to the year for high yield markets, an increase in defaults (particularly in the energy sector) and plenty of downgrades has created the context for an increased supply of fallen angels. Within the first two months of this year roughly $50bn (£39bn) of ex-investment grade debt entered the US high yield market. This amount is already higher than the overall amount for 2015 and is expected to increase throughout the year:
Fallen angel bonds have provided historically better returns than other bonds in the high yield market, even after adjusting for volatility and rating composition. The asset class represents a very interesting option for flexible investors, especially given the current wave of downgrades.
Meike Bliebenicht is senior product specialist – multi-asset at HSBC Global Asset Management
Key points
Fallen angel bonds, a sub-segment of high yield corporate bonds, could potentially provide an interesting investment opportunity
There are hardly any periods over the past 20 years where investing in high yield bonds has provided better returns than fallen angels
Fallen angel bonds have provided historically better returns than other bonds in the high yield market
