Fallen Angels Outshine High Yield

December 12, 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

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

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#DURATION

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Important Definitions and Disclosures

Please note that VanEck may offer investments products that invest in the asset class(es) or industries included in this blog.

This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities, financial instruments or digital assets mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, tax advice, or any call to action. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results, are for illustrative purposes only, are valid as of the date of this communication, and are subject to change without notice. Actual future performance of any assets or industries mentioned are unknown. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third party data. The information herein represents the opinion of the author(s), but not necessarily those of VanEck or its other employees.

A fallen angel bond is a bond that was initially given an investment-grade rating but has since been reduced to junk bond status.

High yield bonds may be subject to greater risk of loss of income and principal and are likely to be more sensitive to adverse economic changes than higher rated securities.

A rising star is a high yield bond that is upgraded to investment grade.

Duration is an estimate of how much the value of a bond portfolio would be affected by a change in prevailing interest rates. The longer a portfolio’s duration, the more sensitive it is to changes in interest rates.

There are inherent risks with fixed income investing. These risks may include interest rate, call, credit, market, inflation, government policy, liquidity, or junk bond. When interest rates rise, bond prices fall. This risk is heightened with investments in longer duration fixed-income securities and during periods when prevailing interest rates are low or negative.

Index returns are not Fund returns and do not reflect any management fees or brokerage expenses. Certain indices may take into account withholding taxes. Investors cannot invest directly in the Index.

ICE BofA US High Yield Index (H0A0, “Broad HY Index”), formerly known as BofA Merrill Lynch US High Yield Index prior to 10/23/2017, is comprised of below-investment grade corporate bonds (based on an average of various rating agencies) denominated in U.S. dollars.

ICE US Fallen Angel High Yield 10% Constrained Index (H0CF, “Fallen Angels Index”) is a subset of the ICE BofA US High Yield Index and includes securities that were rated investment grade at time of issuance.

Fallen Angel U.S. High Yield index data on and prior to February 28, 2020 reflects that of the ICE BofA US Fallen Angel High Yield Index (H0FA). From February 28, 2020 forward, the Fallen Angel U.S. High Yield index data reflects that of the ICE US Fallen Angel High Yield 10% Constrained Index (H0CF). Fallen Angel U.S. High Yield index data history which includes periods prior to February 28, 2020 links H0FA and H0CF and is not intended for third party use.

ICE Data Indices, LLC and its affiliates (“ICE Data”) indices and related information, the name "ICE Data", and related trademarks, are intellectual property licensed from ICE Data, and may not be copied, used, or distributed without ICE Data's prior written approval. The licensee's products have not been passed on as to their legality or suitability, and are not regulated, issued, endorsed, sold, guaranteed, or promoted by ICE Data. ICE Data MAKES NO WARRANTIES AND BEARS NO LIABILITY WITH RESPECT TO THE INDICES, ANY RELATED INFORMATION, ITS TRADEMARKS, OR THE PRODUCT(S) (INCLUDING WITHOUT LIMITATION, THEIR QUALITY, ACCURACY, SUITABILITY AND/OR COMPLETENESS).

All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future results.

© Van Eck Associates Corporation.

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Important Definitions and Disclosures

Please note that VanEck may offer investments products that invest in the asset class(es) or industries included in this blog.

A fallen angel bond is a bond that was initially given an investment-grade rating but has since been reduced to junk bond status.

High yield bonds may be subject to greater risk of loss of income and principal and are likely to be more sensitive to adverse economic changes than higher rated securities.

A rising star is a high yield bond that is upgraded to investment grade.

Fallen Angels Outshine High Yield

Nicolas Fonseca, CFA

Cumulative Total Return

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