Trends with Benefits #17: Ed Lopez and Martin Fridson talk Fallen Angel High Yield Bonds
Ed Lopez, Head of ETF Product
June 30, 2020
Many investors keeping up with financial media may have heard of “fallen angel” bonds for the first time this year. The Federal Reserve, as part of its bond buying program, allowed for the purchase of fallen angels. Fallen angel bonds are bonds that were issued with an investment-grade credit rating but have since been downgraded to below investment-grade, also known as ‘high yield’. In this episode, I speak with Martin Fridson, Chief Investment Officer of Lehmann Livian Fridson Advisors LLC. Marty has been researching and writing about the high yield bond space since the 1980s and we chat a little bit about high-yield lore from the 80’s, the high yield market today and the impact of the wave of fallen angel bonds on the high yield market this year.
2020 has been a notable year for fallen angels with approximately $100 billion in new fallen angels, expectations are that could grow to $300 billion by year end. If you invest in investment grade bonds you typically want to avoid holding something that becomes a fallen angel. If you are, however a high-yield bond investor and/or simply someone looking for contrarian play or dislocations in the market, you may salivate for a year like this.
Fallen Angel Volume Has Corresponded with Strong Returns
Historically, strong returns versus the broad high yield bond market have followed periods of large fallen angel volume. A key factor in these returns is the discount at which newly fallen angel bonds trade. This year, discounts have been bigger than average. The average discount of new fallen angels for the ten years ending December 31, 2019 is 7.9%. The average discount of new fallen angels this year through May is nearly 15%.1
Source: ICE Data Indices. Data as of 5/31/2020. See disclaimers and index descriptions at the end of this presentation. 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 index data reflects that of the Fund's underlying index, the ICE US Fallen Angel High Yield 10% Constrained Index (H0CF). Index history which includes periods prior to February 28, 2020 links H0FA and H0CF and is not intended for third party use.
Now of course, there is no guarantee past results will repeat, but given the market dynamics this year and the history of fallen angels I couldn’t wait to speak to Marty about the potential of the fallen angel bond market.
Trend or Fad
Listen for Marty’s take on yield curve control, recreational vehicles, smart-beta fixed-income and meatless burgers.
1 Source: FactSet, ICE as of 5/31/2020. 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 index data reflects that of the Fund's underlying index, the ICE US Fallen Angel High Yield 10% Constrained Index (H0CF). Index history which includes periods prior to February 28, 2020 links H0FA and H0CF and is not intended for third party use. It is not possible to invest directly in an index.
Please note that Van Eck Securities Corporation (an affiliated broker-dealer of Van Eck Associates Corporation) may offer investments products that invest in the asset class(es) discussed in this podcast.
The views and opinions expressed are those of the speaker(s) but not necessarily those of VanEck. Commentaries are general in nature and should not be construed as investment advice. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results, are valid as of the date of this communication and subject to change without notice. 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. Any discussion of specific securities/financial instruments mentioned in the commentary is neither an offer to sell nor a solicitation to buy these securities. Fund holdings will vary. All indices mentioned are measures of common market sectors and performance. It is not possible to invest directly in an index. Information on holdings, performance and indices can be found at vaneck.com.
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 performance.
Web Access Notice: VanEck is committed to ensuring accessibility of its website for investors and potential investors, including those with disabilities. If you have difficulty accessing any feature or functionality on the VanEck website, please feel free to call us at 800.826.2333 or email us at firstname.lastname@example.org for assistance.
This website is published in the United States for residents of specified countries. Investors are subject to securities and tax regulations within their applicable jurisdictions that are not addressed on this website. Nothing on this website should be considered a solicitation to buy or an offer to sell shares of any investment in any jurisdiction where the offer or solicitation would be unlawful under the securities laws of such jurisdiction, nor is it intended as investment, tax, financial, or legal advice. Investors should seek such professional advice for their particular situation and jurisdiction.
Investing involves risk, including possible loss of principal. An investor should carefully consider investment objectives, risks, charges and expenses carefully before investing. This and other information can be found in the appropriate regulatory documents made available for a specified country as designated in this website.
Van Eck Securities Corporation, Distributor 666 Third Avenue New York, NY 10017800.826.2333