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Fallen Angels Outshine High Yield

12 December 2023

Read Time 5 MIN

Favorable rate trends in November drove Fallen Angel Index outperformance; Automotive sector removed from Index upon Ford’s elevation to rising star.

In November, fallen angels (as represented by the ICE US Fallen Angel High Yield 10% Constrained Index, “H0CF”) demonstrated superior performance, surpassing the broad high-yield market (as represented by the ICE BofA US High Yield Index, “H0A0”) by 1.22% (5.77% vs 4.55%). This success can be primarily attributed to favorable rate trends, particularly as the 10-year yield declined throughout the month, benefiting long-duration bonds. The 5.77% return achieved by fallen angels represents their most robust monthly performance since November 2020. Currently, fallen angels are mounting a late-stage effort to potentially outpace the broad high-yield market for the year. If successful, this would mark 15 out of the last 20 calendar years of such achievement and notably, 8 out of 11 years of outperformance during periods of significant interest rate increases. Instances where fallen angels lagged behind broad high yield while rates rose occurred in 2005, 2018, and 2022.

Following lower-than-anticipated U.S. inflation figures, marginally softer jobless statistics and personal consumption expenditures (PCE) in line with expectations, the market's implied likelihood of another rate hike has declined to nearly 0%, with some anticipating multiple cuts in 2024. The direction of longer-term yields is more uncertain, but over the past month have declined sharply, benefitting longer duration strategies and providing a tailwind to fallen angels given their somewhat higher duration compared to the broad high yield market. High-yield corporate ETFs experienced approximately $11bn in inflows, contrasting with Treasuries and Inflation-Protected ETFs, which witnessed approximately $6bn in outflows. Notably, there's a noticeable shift as Intermediate and Long durations collectively attracted approximately $32bn, while Ultra-Short and Short duration strategies saw outflows of approximately $8bn, indicative of investors incorporating both credit and duration risk into their portfolios.

Cumulative Total Return

Line chart comparing cumulative total returns of Fallen Angel Index, Broad HY Index and 10 Year Treasuries

Source: US Treasury, ICE Data Services, VanEck. Past performance is no guarantee of future results.

Fallen Angels Overall Statistics: Fallen angel yields decreased by 89bps to 7.45% and spreads tightened by 42bps to 285. Broad HY saw similar changes, with yields decreasing 98bps to 8.50% and spreads tightening by 58bps to 384. The fallen angel market value declined with the exit of Ford, a redemption of a Royal Caribbean bond and a Murphy Oil Corp bond that no longer qualified for index inclusion, dropping the market value from $74bn to $62bn. Fallen angel duration increased slightly with these changes. Broad HY saw another issuer default this past month – WeWork – although it was a minimal size, $525m face value, and not part of the fallen angel index.

  Fallen Angel Broad HY
  12/31/22 3/31/23 6/30/23 9/30/23 10/31/23 11/30/23 12/31/22 3/31/23 6/30/23 9/30/23 10/31/23 11/30/23
Yield to Worst 7.49 7.08 7.35 8.02 8.34 7.45 8.98 8.49 8.56 8.94 9.48 8.50
Effective Duration 5.45 5.30 4.98 4.90 4.93 5.16 4.04 3.83 3.65 3.64 3.67 3.49
Full Market Value ($mn) 112,854 114,776 84,590 78,279 74,096 62,275 1,199,909 1,234,319 1,218,316 1,201,541 1,174,212 1,189,484
OAS 337 325 297 314 327 285 481 458 405 403 442 384
No. of Issues 212 206 163 159 153 136 1,927 1,916 1,870 1,872 1,854 1,827

Source: ICE Data Services, VanEck. Fallen Angels: ICE US Fallen Angel High Yield 10% Constrained Index. Broad HY: ICE BofA US High Yield Index. OAS refers to “option-adjusted spread.” Please see definition for this and other terms referenced herein in the disclosures and definitions portion of this blog. Past performance is no guarantee of future results. Index performance is not representative of fund performance. It is not possible to invest in an index.

New Fallen Angels: None in November.

Month-end Addition Name Rating Sector Industry % Mkt Value Price
February Entegris Escrow Corp BB1 Technology & Electronics Electronics 1.39 90.92
March First Republic Bank B3 Banking Banking 0.40 54.63
March Nissan Motor Acceptance BB1 Automotive Auto Loans 2.57 87.19
March Nissan Motor BB1 Automotive Automakers 5.49 92.98
April Crane NXT BB3 Capital Goods Diversified Capital Goods 0.24 70.99
April Rogers Communications BB2 Telecommunications Telecom - Wireless 0.65 90.35
April Western Alliance Bancorporation BB1 Banking Banking 0.44 76.39
August Associated Banc-Corp BB1 Banking Banking 0.33 95.69
August Valley National Bancorp BB1 Banking Banking 0.33 79.84
September Brandywine Operating Partnership L.P. BB1 Real Estate REITs 1.86 87.29
September Port of Newcastle Investments Financing Pty Limited BB1 Transportation Transport Infrastructure/Services 0.36 82.79

Source: ICE Data Services, VanEck. Fallen Angels: ICE US Fallen Angel High Yield 10% Constrained Index. Past performance is no guarantee of future results. Not a recommendation to buy or sell any of the names/securities mentioned herein. Index performance is not representative of fund performance. It is not possible to invest in an index.

Rising Stars: As expected, Ford was removed from the fallen angel index during the November month-end rebalance at $93.05 after having entered in April 2020 at $86.87. Over the last 12 months in the index, Ford price returned 1.10%, lagging both fallen angels (3.31%) and broad high yield (1.78%).

Month-end Exit Name Rating Sector Industry % Mkt Value Price
February Autopistas Metropolitanas de Puerto Rico LLC BB1 Transportation Transport Infrastructure/Services 0.35 100.49
February Nokia Corp BB1 Technology & Electronics Tech Hardware & Equipment 0.47 97.50
March Western Midstream BB1 Energy Gas Distribution 5.27 90.44
April Sprint Capital Corp BB1 Telecommunications Telecom - Wireless 4.70 114.25
May Mattel Inc. BB2 Consumer Goods Personal & Household Products 0.45 85.32
May Nissan Motor Acceptance BB1 Automotive Auto Loans 2.67 85.12
May Nissan Motor BB1 Automotive Automakers 5.57 88.49
May Occidental Petroleum Corp BB1 Energy Energy - Exploration & Production 8.69 93.82
June APA Corp BB1 Energy Energy - Exploration & Production 3.84 82.69
July Western Digital Corp BB1 Technology & Electronics Tech Hardware & Equipment 0.99 76.97
August Howmet Aerospace Inc BB1 Capital Goods Aerospace/Defense 2.04 99.55
September Patterson-UTI Energy Inc. BB1 Energy Oil Field Equipment & Services 1.07 90.37
November Ford Motor Company BB1 Automotive Automakers 4.29 90.34
November Ford Motor Credit Company BB1 Automotive Auto Loans 5.49 95.26

Source: ICE Data Services, VanEck. Fallen Angels: ICE US Fallen Angel High Yield 10% Constrained Index. Past performance is no guarantee of future results. Not a recommendation to buy or sell any of the names/securities mentioned herein. Index performance is not representative of fund performance. It is not possible to invest in an index.

Fallen Angels Performance by Sector: All 17 sectors posted positive returns for November with Financial Services (although only comprised of two issuers, thus low exposure) taking the lead with an 11.08% return, as its price jumped from $74.92 to $82.94, while Basic Industry posted the worst return at 3.63%. The two largest sectors, Energy and Telecom, posting 5.79% and 7.54% respectively, were two sectors that contributed positively to outperformance vs broad high yield, mainly due to their long duration/rates effect. The removal of Ford and the Automotive sector from the fallen angel index did not result in significant changes to the 16 remaining sectors.

  Wgt (%) OAS Price Total Return (%)
  12/31/21 3/31/23 6/30/23 9/30/23 10/31/23 11/30/23 12/31/21 3/31/23 6/30/23 9/30/23 10/31/23 11/30/23 12/31/21 3/31/23 6/30/23 9/30/23 10/31/23 11/30/23 MTD
Automotive 10.00 18.06 10.00 10.00 10.00   262 246 211 206 205   91.35 92.21 92.99 91.16 89.95   3.84
Banking 3.81 3.99 3.20 4.34 4.54 5.05 302 415 376 279 301 274 96.85 87.61 88.57 92.02 89.88 93.15 4.05
Basic Industry 1.36 1.33 1.93 1.92 2.03 2.23 226 227 168 178 194 144 92.17 93.85 94.44 93.53 92.45 95.49 3.63
Capital Goods 5.12 5.10 7.66 5.86 5.60 6.26 279 240 195 250 250 198 95.01 98.54 96.85 92.44 91.34 95.11 4.53
Consumer Goods 3.07 3.00 3.62 3.82 4.04 4.57 275 255 298 271 326 264 88.90 91.27 89.31 88.24 86.98 91.83 6.06
Energy 27.93 22.16 15.28 14.45 14.63 15.93 293 303 297 288 294 252 88.13 90.05 88.74 87.48 85.20 89.48 5.79
Financial Services 0.65 0.64 0.94 0.98 1.00 1.18 540 506 459 420 527 395 77.20 80.27 80.92 79.51 74.92 82.94 11.08
Healthcare 3.02 3.03 4.33 4.62 4.88 5.49 362 304 281 299 298 223 83.56 86.47 86.82 84.72 83.31 88.56 6.63
Insurance 0.85 0.82 1.15 1.20 1.25 1.42 347 364 358 366 375 334 92.10 92.99 91.39 87.81 86.20 91.08 6.14
Leisure 7.88 7.79 10.42 7.87 8.32 8.39 325 243 182 257 276 242 89.95 93.25 93.34 89.37 88.79 91.12 4.30
Real Estate 5.13 4.72 6.22 8.37 7.15 8.07 697 701 602 660 775 643 79.46 80.72 80.99 80.86 76.74 80.96 5.91
Retail 5.67 5.49 7.79 7.98 7.99 9.13 471 474 354 368 352 288 73.75 74.72 82.35 78.48 77.36 83.02 7.75
Services 0.38 0.37 0.53 0.57 0.61 0.68 388 368 356 309 307 272 87.11 89.89 88.62 88.75 88.12 91.67 4.42
Technology & Electronics 4.20 4.67 6.21 5.57 5.82 6.55 327 287 269 262 260 204 85.47 88.19 86.89 87.23 85.84 90.93 6.31
Telecommunications 11.91 11.68 10.61 11.53 12.00 13.65 423 433 475 418 432 378 90.04 91.39 84.92 84.95 82.99 88.81 7.54
Transportation 2.10 1.78 2.59 3.14 1.98 2.22 279 231 150 203 241 202 90.49 92.69 94.75 91.70 88.14 92.75 5.65
Utility 6.93 5.38 7.52 7.77 8.17 9.18 213 206 165 175 173 133 89.95 90.19 89.90 86.28 85.08 89.58 5.61
Total 100 100 100 100 100 100 337 325 297 314 327 285 87.91 89.51 88.78 86.69 84.94 88.95 5.77

Source: ICE Data Services, VanEck. Fallen Angels: ICE US Fallen Angel High Yield 10% Constrained Index. Not intended as a recommendation to invest or divest in any of the sectors mentioned herein. Index performance is not representative of fund performance. It is not possible to invest in an index.

Fallen Angels Performance by Rating: Single-B outperformed as its priced increased by 7.42% in November. Digging deeper into the rating attribution of fallen angels vs broad high yield, it was the BB1 and BB2 buckets that contributed to more than 100% of the outperformance. Something worth noting is that the BB-rated bucket has fallen below 80%, which has not occurred since January 2020, when the fallen angel exposure to BBs was 77.36%.

  Wgt (%) OAS Price Total Return (%)
  12/31/22 3/31/23 6/30/23 9/30/23 10/31/23 11/30/23 12/31/22 3/31/23 6/30/23 9/30/23 10/31/23 11/30/23 12/31/22 3/31/23 6/30/23 9/30/23 10/31/23 11/30/23 MTD
BB 87.00 87.08 83.01 81.02 81.82 79.38 284 281 256 257 266 226 90.02 91.51 89.83 87.94 86.40 90.28 5.46
B 10.95 10.37 13.31 15.03 14.08 16.12 608 500 406 493 530 433 82.50 85.35 89.55 86.37 83.70 89.91 7.85
CCC 1.98 2.50 3.68 3.43 3.55 3.90 1,020 1,014 852 810 841 797 60.88 64.60 68.55 67.01 64.84 67.84 5.33
CC       0.52 0.55 0.60       835 846 900       72.91 72.53 72.83 0.92
Total 100 100 100 100 100 100 337 325 297 314 327 285 87.91 89.51 88.78 86.69 84.94 88.96 5.77

Source: ICE Data Services, VanEck. Fallen Angels: ICE US Fallen Angel High Yield 10% Constrained Index. Not intended as a recommendation to invest or divest in any of the sectors mentioned herein. Index performance is not representative of fund performance. It is not possible to invest in an index.