Fallen angels (as represented by the ICE US Fallen Angel High Yield 10% Constrained Index, “H0CF”) outperformed the broad high yield market (as represented by the ICE BofA US High Yield Index, “H0A0”) by 0.59% in Q3 (2.99% vs. 2.40%), widening the year-to-date gap to 0.78% (7.84% vs. 7.06%). After underperforming in July by 0.13%, fallen angels rebounded in August and September with outperformance of 0.10% and 0.62%, respectively. Most of the relative strength occurred in September, as the longer duration profile of fallen angels benefited from lower treasury yields. While overall yields declined, the yield curve continued to steepen, with short-term yields falling more than long-term yields, potentially signaling more caution about the longer-term inflation outlook.

The third quarter differed meaningfully from the second, despite also featuring a tariff announcement on August 1. Credit spreads widened, though to a much lesser extent than during the April 2 episode. This time, the move was less of a surprise, as some degree of policy risk was already embedded in markets. In addition, anticipation of the Fed’s latest rate cutting cycle, in response to softening labor market conditions, helped to cushion the impact and support spread recovery.

Looking ahead to Q4, we expect dispersion in the high yield market to remain elevated, as a slowing economy and renewed tariff uncertainty continue to create idiosyncratic pressures across issuers. While these factors may drive isolated fallen angel events, we see limited signs of a broad downgrade wave. Spreads are likely to remain supported by solid corporate fundamentals, low default rates and continued investor demand for yield.

Within high yield market, BB rated bonds continue to lead performance, while CCC & lower rated bonds keep climbing back.

BB still outperforming YTD but CCC and lower rated outperformed in Q3

Source: ICE Data Services as of 9/30/2025, VanEck. BB represented by ICE BofA BB US High Yield Index; B represented by ICE BofA Single-B US High Yield Index; CCC and below represented by ICE BofA CCC & Lower US High Yield Index. ICE BofA BB US High Yield Index is a subset of ICE BofA US High Yield Index including all securities rated BB1 through BB3, inclusive. ICE BofA Single-B US High Yield Index is a subset of ICE BofA US High Yield Index including all securities rated B1 through B3, inclusive. ICE BofA CCC & Lower US High Yield Index is a subset of ICE BofA US High Yield Index including all securities rated CCC1 and below.

Fallen Angels Overall Statistics: Credit spreads were notably more stable in Q3, despite a short-lived spike on August 1 following the new tariff announcement, before resuming a tightening trend. Spreads now sit approximately 30 bps (fallen angels) and 39 bps (broad high yield) from their cycle lows and continue to represent roughly 30% of total yield. Although tight, current high yield spread levels are notably above their 2021 tights, in contrast to investment grade bonds, which reached their tightest levels in September. Spread tightening was a positive contributor to Q3 outperformance, but the main drivers were security selection and duration. Despite both seeing modest declines in duration during the quarter, fallen angels remain longer by roughly 1.6. Broad high yield duration fell to a new all-time low of 2.83 years.

From a pricing perspective, both indices are now above their historical averages (since December 2003) by $0.13 for fallen angels and $1.88 for broad high yield, suggesting continued potential for relative outperformance, consistent with year-to-date trends.

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: Fallen angels continued to exhibit their idiosyncratic profile in Q3. Two new fallen angels entered in the index in July: Huntsman International and WarnerMedia Holdings. Huntsman senior unsecured ratings were downgraded by Moody’s to Ba1 from Baa3 citing earning weakness, elevated leverage and governance concerns. WarnerMedia’s inclusion followed a large downgrade that had been anticipated since June but was delayed due to uncertainty around the company’s debt restructuring. The sole qualifying issue entered the index in July at an approximate 10% discount, recovering most of that within two months.

WarnerMedia

ICE Data Services as of 9/30/2025, VanEck. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities referenced herein.

August saw another two issuers enter the index. S&P downgraded PacifiCorp junior subordinated notes to BB+ from BBB- primarily because its financial performance weakened and regulatory outcome in Utah that limited cost recovery, leading to persistently low cash flow to debt levels. BlackRock TCP Capital Corp senior secured debt and senior unsecured debt were downgraded by Fitch to BB+ from BBB-, due to deterioration on their asset quality which caused high realized loss rates in the first half of 2025. Fitch noted that BDCs may face continued credit headwinds through the second half of 2025 amid weaker earnings, tighter funding and risk of elevated losses.

JP Morgan updated its forecast for its fallen angel pipeline for the remainder of the year, with no fallen angels in sight. However, the BBB- universe continues to shrink, with approximately $63bn of BBB- debt carrying both a high-yield rating and a negative rating outlook from at least one of the three rating agencies. The names include Paramount, Ford and Centene.

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.

Rising Stars: No rising stars in Q3.

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: Q3 brought changes to the sector composition, as Huntsman International added approximately 2% to the Basic Industry Sector, making it the largest exposure in the Fallen Angel Index. The sole issue of WarnerMedia meant a new sector in the Fallen Angel Index, Media, which had not been part of the index since the summer of 2019. Utility increased due to the entrance of PacifiCorp and Retail, which had been the largest exposure after the Energy/Covid downgrade wave, saw its exposure decrease as Walgreens was removed from the index due to size requirements in Q3. Spreads tightened across the majority of sectors with Energy having the biggest impact, thus providing the highest total return for Q3. Retail, Autos and Energy were the top contributors to relative performance vs broad high yield during the quarter, while Media, Financial Services and Services detracted the most from relative performance. YTD, the top contributors are Retail, Real Estate and Telecom while the detractors remain the same.

*Doesn’t have securities for all months. Returns are based on partial period data.

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: BB-rated exposure increased during the quarter with the addition of new fallen angels, while CCC-rated exposure increased with the downgrades of Services Properties Trust (REITS) and Xerox (Tech) to CCC from Single-B. In terms of relative performance vs broad high yield, BB-rated were the top contributors in Q3 and YTD.

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 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

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