Fallen Angels Outshine High Yield

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

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.

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.

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%).

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.

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%.

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.