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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.
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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.
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.
Listen for Marty’s take on yield curve control, recreational vehicles, smart-beta fixed-income and meatless burgers.
1 Source: FactSet, ICE as of 31/5/2020. Index data on and prior to 28 February 2020 reflects that of the ICE BofA US Fallen Angel High Yield Index (H0FA). From 28 February 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 28 February 2020 links H0FA and H0CF and is not intended for third party use. It is not possible to invest directly in an index.
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