Search this website. You can use fund codes to locate specific funds

Weekly credit insight

Chart of the week: are fallen angels a blessing in disguise?

Fallen angel risk – or the possibility that bonds will be downgraded to junk status – has dominated the headlines over the past two years. And for good reason: the BBB-rated segment of the market (the lowest tier of investment grade) has grown from less than $2trn in 2010 to nearly $5.5trn in 2020 (see figure 1).

Figure 1. The size of the BBB-rated universe has soared over the past decade

Source: Federated Hermes, as at January 2020.

There are several reasons for this. Interest rates at record lows encouraged companies to increase their share of debt financing, while a stronger macroeconomic environment in the run-up to the summer of 2018 led to a growing number of rising stars.1 In addition, quantitative easing and the growth of reverse Yankees2 mean the European BBB-rated market has quadrupled to €1.2tn over the past decade.

The global high-yield market has also stagnated since 2015. Financing was redirected to the leveraged-loan market, which benefited from the recovery in collaterised-loan obligations and the move into floating-rate products by retail clients spooked by rising interest rates. This meant the US ten-year treasury yield rose from 1.35% in 2016 to 3.25% in 2018.

This year has seen a number of companies downgraded. While it seems that pressure is building up in certain parts of the market, the high-yield space has shrunk by more than $100bn over the past five years. With nearly all BB-rated bonds trading above call, these downgrades could be seen as a blessing rather than a curse.  

The risk of a recession is low, and the majority of companies are wary of forsaking their investment-grade ratings in exchange for higher shareholder returns. This means that there should be just enough fallen angels in 2020 to reinject some convexity into the BB-rated market and introduce more liquid capital structures with multiple access points.

Importantly, a pickup in fallen angels should also increase the size of the high-yield market – something that is greatly needed, given that macroeconomic uncertainty has lowered demand for equities and a silver-tsunami reallocation to fixed income is well underway.

More Insights

Climate Change High Yield Credit strategy, interim report 2022
In this inaugural report, we delve into what makes the Federated Hermes Climate Change High Yield Credit strategy unique. As well as introducing our process and team, the report provides an overview of our proprietary Climate Change Impact (CCI) score, complete with portfolio examples to illustrate the scoring system in practice.
Federated Hermes Stewardship Report 2021
At Federated Hermes we believe the investment industry can be a powerful force for good, building a fairer, more equitable world for all – and that active ownership and engagement is the best way to achieve this. In this, our second annual Stewardship Report, we provide an update on our efforts towards effective and outcomes-driven stewardship.
The chimps are coming
The public art exhibition Chimps are Family, unveiling on Endangered Species Day (Friday the 20th of May) at Tower Bridge, sets to create awareness around the plight of the endangered apes.
Market snapshot: Slowdown fears send equities spinning
Stagflation concerns continue to mount, with investors piling into cash positions as the global growth outlook plunges.
Plus and minus: can QT annihilate QE (and other anti-inflation questions for financial markets)
Fiorino queries whether investors should expect an equal-and-opposite reaction as central banks release the anti-QE solution into the real world...
The soil carbon sponge: A sequestration trump card
In a briefing to investors, Walter Jehne, co-founder of NGO Regenerate Earth, argued that a focus on cutting emissions misses the point when it comes to understanding what a healthy biosphere could do to sequester carbon.