Fallen Angels Take Flight: A Strong Start to 2025

Fallen angels (as represented by the ICE US Fallen Angel High Yield 10% Constrained Index, “H0CF”) began 2025 on a positive note, outperforming the broad high-yield market (as represented by the ICE BofA US High Yield Index, “H0A0”) by 0.10% (1.48% vs. 1.38%). The outperformance was driven by declining interest rates and tightening credit spreads, particularly in the Real Estate sector, which is the second largest overweight versus broad high yield, behind Retail. The 10-year U.S. Treasury yield fluctuated throughout the month, peaking at 4.79% before settling at 4.52%. The U.S. Federal Reserve (Fed) held interest rates steady in January and is expected to maintain this stance until the summer, although we anticipate that expectations will continue to adjust based on new data points. Lower-rated bonds continued last year’s trend of leading performance, with the CCC & below index returning 1.64%, compared to 1.42% for single-B rated bonds and 1.29% for BB-rated bonds.

Fallen angels are off to a strong start this year. We believe interest rates will remain a key driver of returns in 2025, as they currently account for approximately 65% of total yield. Additionally, credit spreads can remain tight for extended periods, as corporate fundamentals take time to shift. Since 2003, there have been 6 periods—lasting between 0.4 and 3.9 years—where high-yield spreads remained below their historical average and fallen angels outperformed by approximately 3%. Fallen angels have underperformed by 2% during the current period, which has now reached 2.5 years. This makes it an outlier compared to historical trends. However, the current tight spread period is not over, and wider spreads would likely reflect a changing credit environment in which fallen angels could benefit, for example due to a higher volume of new fallen angels, higher quality or evolving sector themes.

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 strategy performance. It is not possible to invest in an index.

Fallen Angels Overall Statistics: Fallen angels and broad high yield spreads continue tightening, with broad high yield reaching its post global financial crisis (GFC) low of 259bps in late January, although it finished the monthly slightly higher. Yields remained relatively high for both indices, albeit slightly lower than at the beginning of the year.

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 strategy performance. It is not possible to invest in an index.

Fallen Angels: Aptiv PLC junior subordinated debt was downgraded by Fitch to BB+ from BBB-, as the company is planning to spin off its electrical distribution systems business into a separate company. Fitch states that the downgrade aligns more closely with other similarly junior subordinated debt from other issuers. Over the last six months, the junior subordinated debt price decreased to $99.71 from $101.05. Within the Auto sector, S&P affirmed Ford’s BBB- rating in early February but revised its outlook to negative, as Ford’s expansion over the next couple of years appears to be limited due to slower-than-expected progress on cost reduction, high labor costs and increasing pricing pressure. S&P stated that the negative outlook also reflects an increase in the risk of downgrade over the next 12-24 months, which could make Ford a fallen angel again, all else equal, as Moody’s credit rating is Ba1 while Fitch is BBB-.

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 strategy performance. It is not possible to invest in an index.

Rising Stars: None in January.

Fallen Angels Performance by Sector: With Aptiv PLC entering the index this past month, the Auto sector is back on the fallen angel index since the exit of Ford in November 2023. There were no major changes to sector composition, with Retail, Telecom and Real Estate still accounting for approximately 50% exposure, in aggregate, of the index. In January, all but two sectors registered positive returns, with Real Estate taking the lead with a 3.42% total return as its spreads tightened by 88bps. Real Estate is still the only sector with spreads above the 300 level, which may continue to provide upside if spreads continue to grind tighter. The worst performing sector in January was Transportation, although it is represented by only one issuer/bond (XPO Inc). In terms of sector attribution vs broad high yield, Real Estate and Retail were the top contributors to relative outperformance while the lack of Media exposure continued to hurt the fallen angel index.

Source: ICE Data Services, VanEck. Returns are based on partial period data. 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 strategy performance. It is not possible to invest in an index.

Fallen Angels Performance by Rating: Walgreens Boots Alliance was downgraded to B1 from BB3, dropping the fallen angel BB-rated exposure from the mid-to-low 80s into the high 70s, something that has not occurred since January 2020. Relative to the broad high yield market, BB-rated fallen angels contributed the most.

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 strategy performance. It is not possible to invest in an index. BB index: ICE BofA BB US High Yield Index; Single-B index: ICE BofA Single-B US High Yield Index; CCC & Lower rated index ICE BofA CCC & Lower US High Yield Index.