Attractive Setup in Fallen Angels: 7% Yield and New Downgrades

Key Takeaways:

• Wider spreads have driven fallen angel yields above 7%, their highest levels since mid-2025. Yields versus broad high yield have narrowed significantly, with ANGL, yielding 6.73%^*.
• Two large fallen angels entered the index in Q1 2026: Paramount and FS KKR, together adding more than 15% in market value and reshaping sector exposure.
• Fallen angels underperformed high yield by 0.76% in Q1 2026, as geopolitical-driven spread widening in March erased gains built through February.

Fallen angels underperformed the broad high yield market by 0.76% in Q1 2026 (-1.31% vs. -0.55%), driven by market volatility in March. Through February, fallen angels were outperforming. However, geopolitical tension in the Middle East drove fallen angel spreads wider by 49bps in a single month vs. only 16bps for broad high yield, and the longer duration profile amplified the move. Despite the drawdown, for investors looking at high yield allocations, yields above 7% combined with a historically wide price discount make this a moment worth paying attention to. Further, the differential in yields between fallen angels and the broad market has tightened. Given the significantly higher average credit quality of fallen angels, we believe fallen angels look relatively attractive.

Q1 2026 Total Returns

Source: ICE Data Services, VanEck. Fallen Angels: ICE US Fallen Angel High Yield 10% Constrained Index.; Broad HY: ICE BofA US High Yield Index. Past performance is no guarantee of future results. Index performance is not representative of strategy performance. It is not possible to invest directly in an index.

Looking ahead into the remainder of the year, fallen angel yields of north of 7% provide attractive income levels as they are now above the 1Y, 3Y, 5Y, 10Y and since December 2003 average. We continue to expect returns for the remainder of the year to be driven more by carry and interest rate movements, as spreads, despite widening to end the quarter, are still relatively tight but have been getting closer to their 10Y average. A significant increase in fallen angel activity, however, could drive total returns higher and the recent uptick in downgrade volume may indicate increased probability of this upside scenario. Just in the first days of April, S&P downgraded Centene (approximately $14bn of par amount in the investment grade index) to BB+ from BBB-, stating that it faces structural challenges in its Medicaid and Affordable Care Act product segments which may result in earnings risks. Nevertheless, market stress whether from geopolitics or broader private credit concerns, poses potential downside risk.

Fallen Angels Overall Statistics: Credit spreads were relatively flat in January and February but widened in March as geopolitical tensions in the Middle East escalated, pushing rates and spreads higher. Q1 2026 was the worst quarter for high yield total returns since Q3 2022, as wider spreads and higher rates delivered a dual headwind across the market. Fallen angel spreads widened 60bps in Q1 while broad high yield spreads ended 47bps wider than at the end of last year. The significant difference occurred in March, thus the underperformance, as fallen angels widened by 49bps while broad high yield by just 16bps. Yields followed a similar path, with fallen angels not significantly changed in the first two months and then spiking by 88bps in March, while broad high yield saw a 60bps increase. The last time fallen angel yields were above 7% and broad high yield near 7.5% was following Liberation Day in 2025. Fallen angels' yield of 7.18% sits above the average since December 2003.

With the increase in yield and spreads, fallen angel prices decreased to below $90, which we are watching closely as the more than $5 gap between broad high yield and fallen angels has been a sign of outperformance in the past. Outperformance has been approximately 1% and 2% for the forward 1Y and 3Y periods. Fallen angels’ duration was flat during the quarter, while broad high yield reversed its course and increased to above 3 years. Duration was a major contributor to fallen angel underperformance in March as the 10Y yield rose sharply before finishing the quarter at 4.30%.

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: There were three fallen angels in Q1: SES SA, Paramount Global and FS KKR. SES SA was downgraded by Moody’s in December 2025 and subsequently by Fitch in January 2026, entering the fallen angel index in January. Fitch's downgrade reflects structurally weaker earnings and tighter leverage headroom post-Intelsat amid rising competitive pressure. Paramount and FS KKR entered the index in March and added more than 15% in market value. Fitch downgraded Paramount to BB+ from BBB- in early March, following the Warner Bros. Discovery acquisition. The downgrade reflects continued FCF headwinds from transformation costs and sector-wide pressure. Fitch stated that leverage and FCF could remain stretched beyond what they’d normally tolerate for a BBB- name. Paramount joins the index at a 10% exposure and its bonds have showcased the first leg of the fallen angel “V-shaped” price with its bonds price down ~15% over the past six months. We expect Paramount bonds to recover a portion of that decline over the coming months, as is typical with large fallen angels. FS KKR (a BDC) was downgraded by Moody's to Ba1 from Baa3, citing weaker profitability, NAV erosion vs BDC peers, higher leverage and a less senior asset mix. As seen below, FS KKR bond prices were approximately 3% down over the last 6 months. The entry of FS KKR bonds marks the third BDC in the fallen angel index, alongside Prospect Capital Corp and BlackRock TCP Capital Corp, providing a total exposure of ~6% to BDC bonds. The broader significance of BDC exposure became clearer just days after quarter-end, when Moody's revised its outlook on the entire US BDC sector to negative, citing rising redemption pressures, higher leverage and weakening access to funding markets. The pressure is high among non-traded BDCs, which recorded their first-ever net outflows in early 2026 after strong inflows as recently as Q3 2025. Moody's also flagged software exposure as roughly 20-25% of BDC portfolios may be tied to AI disruption, though they noted that near-term ratings impact is limited given software loan maturities don't increase materially until 2028-2029.

Price Action over Previous 6 Months to Index Entry

Source: ICE Data Services, VanEck. Past performance is no guarantee of future results. These are not recommendations to buy or to sell any security. Securities and holdings may vary.

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.

The downgrades among BDCs, driven by stress in the private credit market, stand in contrast to the idiosyncratic downgrades of recent years following COVID. Given the addition of a third BDC to the index, we reviewed the amount of private credit structures of bonds rated BBB3. Our findings show that there are 26 issuers with an estimated par amount of $48bn rated BBB3 but only one issuer, Oaktree Specialty Lending Corp (BDC bonds with less than $1bn in par), has a negative outlook by Moody’s and Fitch and a high likelihood of a downgrade to high yield. JP Morgan recently noted that there are $932bn of investment grade bonds rated BBB- by at least one agency. Of that amount, there is approximately 25% on negative watch of which two issuers, Ford and Mylan (Centene was part of this list but the downgrade by S&P in April likely removed it) may just need one agency action as they are already rated high yield by another agency to be downgraded to high yield.

Rising Stars: Only one rising star exited the index in Q1. Frontier Florida LLC was upgraded by Fitch to BBB+ following the completion of the company's acquisition by Verizon Communications Inc. Its single bond left the index at $103.50, providing an approximate 1% price return and 8% total return over the last 12 months before its exit.

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.

Fallen Angels Performance by Sector: Q1 brought major change to the sector composition of the fallen angel index. Media added approximately 10% with the entry of Paramount and it’s now the 4th largest sector exposure, behind Basic Industry, Retail and Autos. Financial Services added about 5% with the addition of FS KKR while all other sectors decreased. The fallen angel index spread widened by 60bps in Q1, as all but Energy and Media saw their spreads widen. Healthcare and Leisure, combining for roughly 4% of exposure, saw spreads widen by more than 100bps but were not the worst performers of the quarter. Basic Industry and Energy posted positive total return while all other 15 sectors had a negative quarter. In terms of relative performance to broad high yield, Basic Industry was the top contributor as its spreads actually tightened slightly in Q1 despite the broader market widening, and its large weight in fallen angels vs a much smaller allocation in broad high yield made the difference. Energy also contributed positively, posting a +1.68% total return as oil-related names held up well amid the geopolitical backdrop. On the other side, Retail was the largest detractor, with a -2.79% return dragging on relative performance given its weight in the 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: The fallen angel index continues to be dominated by BB-rated bonds which saw a slight increase in Q1. CCC-rated fallen angels, comprised of just four issuers, were the only rating bucket to post positive total return for Q1. Their spreads tightened by 24bps, making them the sole contributors to relative outperformance to vs. broad high yield.

Source: ICE Data Services, VanEck. Fallen Angels: 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.

^* 30-day SEC yield as of March 31, 2026