Fallen Angel High Yield Bonds in the Late Cycle | ETF Trends

By William Sokol via Iris.xyz

Recent falling interest rates have led some investors to move towards a more conservative fixed income allocation, but are they missing out on opportunities for yield, particularly within the high yield universe? Fallen angel bonds, or high yield bonds originally issued with investment grade ratings, have outperformed the broad U.S. high yield market so far this year. We believe the current environment of central bank easing will remain supportive of fallen angels and that fallen angels may be attractive as we enter the later stages of the credit cycle.

The outperformance of fallen angels relative to broader high yield has been driven by three primary factors:

  • The technical effect of systematically buying bonds which may be oversold and subsequently capturing a recovery in value.
  • The sector differentiation that occurs from being underweight sectors that are experiencing very favorable credit conditions (and therefore may have lower spreads) and going overweight beaten down sectors in which fundamentals may have bottomed out.
  • The historical tilt of fallen angels towards higher rated high yield bonds, which have historically outperformed lower-rated credits.

These factors each contributed to performance to varying degrees in the second quarter of 2019 and year-to-date. So far this year, fallen angels have performed strongly and are outperforming the broader U.S. high yield market. Fallen angels returned 3.09% in Q2 versus 2.57% for the broad market, bringing year-to-date returns to 11.23%, over 100bps better than the broad benchmark.

Read the full article at Iris.xyz.