What 'Fallen Angels' Have to Offer
When these bonds take a tumble from the ranks of investment grade credits, they present opportunities for investors.
"Fallen angels" are corporate bonds that received investment-grade credit ratings when they were issued but have since been downgraded to junk. Historically, they have tended to exhibit greater volatility relative to the broader high-yield bond market, but they have also delivered better absolute and risk-adjusted returns. Here I will examine what makes this subset of junk bonds unique, and the opportunities they might offer to investors.
The Fallen Angel Market
Fallen angels are different from ordinary junk bonds. They tend to court less credit risk and more interest-rate risk. Compared with a broad index of high-yield bonds, an index of fallen angels will have greater concentration risk. Also, the size and composition of the fallen angel market will evolve more rapidly. This is because cyclical and structural changes in the economy that precipitate credit ratings downgrades will dictate its makeup, not new issuance activity--as is the case with mainline high-yield indexes.
Neal Kosciulek does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.