Fallen Angels in the US credit market

A Fallen Angel is a corporate, or sovereign, bond downgraded from Investment Grade (IG) (minimum rating of BBB- with S&P, Moody’s or Fitch) to a High Yield credit rating (of BB , or below with S&P, Moody’s or Fitch). Thus, the downgrade from Investment Grade (IG) to High Yield (HY) is far more significant than a downgrade for a bond staying within the same asset class. Fallen Angels tend to have higher credit-beta than other HY issues as a result.

This paper, which is the second in the series of Fixed Income Factor Research, provides an in-depth analysis of the carry concept in bond markets. Unlike in our previous paper on value, The Value Effect, the carry factor discussed here has no direct equity counterpart, instead deriving from fixed income concepts only and more specifically the yield curve.

Read this paper to learn more about:

  • The characteristics of fallen angels versus other high yield issues
  • Why fallen angels have shown higher risk-adjusted returns than other high yield issues
  • Fallen Angel Bond Indexes, timing and empirical evidence
  • Return and performance characteristics
  • Size of the Fallen Angel sector in the Corporate Bond market
  • Caveats and concerns about the fallen angel asset class
  • Covenant protection
  • Sector-specific nature of fallen angel spikes
  • Risks for investors − when do fallen angels become value traps?

Supporting documents

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