With 10-year Treasury yields having retreated noticeably in recent weeks, there’s a sense that things could be turning for the better in the bond market. Should that sentiment prove accurate, it could invite renewed risk appetite in select corners of the fixed income space. That could be constructive for high-yield bonds, including fallen angels.
Fallen angels, corporate bonds born as investment-grade debt that are later downgraded to junk status, are accessible via exchange traded funds such as the VanEck Fallen Angel High Yield Bond ETF (ANGL). ANGL, which tracks the ICE US Fallen Angel High Yield 10% Constrained Index, is the oldest and largest ETF dedicated to fallen angel bonds.
Impressive factoids to be sure, but more important than those points is the notion that fallen angels could see renewed interest among market participants if Treasury yields extend recent declines and if the Federal Reserve signals multiple rate hikes could be in the offing next year.
ANGL’s Alluring Income Proposition
ANGL sports a 30-day SEC yield of 7.78%. Alone, that’s likely attractive to income-hungry investors, but the VanEck ETF offers some other high points. For example, ANGL’s big yield doesn’t imply that investors have to take on more risk to access the fund’s income benefits.
In fact, on a year-to-date basis, ANGL is outperforming the Bloomberg US Aggregate Bond Index, the Markit iBoxx USD Liquid High Yield Index, and the Markit iBoxx USD Liquid Investment Grade Index while displaying less annualized volatility than all three of those gauges. That’s nothing new because fallen angels have a propensity for outperforming other corporate bonds over long holding periods.
“Fallen angels have historically offered a superior risk-reward opportunity to traditional high-yield credit,” said Edmund Shing, BNP Paribas’ global chief investment officer, in a recent CNBC interview. “Over time, it has proven to have much lower default rates in high yields as a whole — so much lower risk, but actually very good returns, and returns almost in line with the high yield average, but at the national level, a lower level of risk. So actually, you can still capture 8% plus gross yield of these fallen angels, but at a much lower default risk at a time when the economy is slowing.”
The $2.48 billion ANGL, which is about 11.5 years old, is home to 155 bonds with an average effective duration of five years.
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