“Fallen Angels” Create Alternative Investment Opportunities

“Fallen Angels” Create Alternative Investment Opportunities

almost 4 years ago2 mins

Debt rating agencies like Standard & Poor’s and Moody’s, the arbiters of corporate creditworthiness, have downgraded US company bonds at the fastest pace on record as the economy locks down to fight coronavirus – forcing some investors to sell and creating opportunities for others.

What does this mean?

Corporate bond investors split into two camps: those with a mandate to purchase the safest company debt – known as investment grade (IG) bonds – and those entitled to buy debt from shakier companies – called high-yield or, less flatteringly, junk bonds. Rating agencies decide how likely borrowers are to default, with those rated BBB or above classed as investment grade. Investors call bonds cut from IG status to junk a fallen angel.

According to a report from Invesco, agencies have downgraded about $150 billion of US investment grade debt to junk this year. And the asset manager expects the 2020 total to reach $216 billion, almost double the previous record of $141 billion set in 2009 😲

Angels in America
Angels in America

Why should I care?

The influx of relative quality from the $6.7 trillion IG bond market to the far smaller $1.2 trillion high yield market might benefit investors willing or able to buy junk bonds. Support for prices is also coming from the Federal Reserve and the European Central Bank, who have both announced programs to purchase fallen angels to prop up the COVID-ravaged economy.

“Besides Fed support, fallen angels have typically performed well once they drop into high yield and may offer an attractive return opportunity outright,” Invesco reckons. Though they warn interested buyers to seek out bonds that aren’t likely to get downgraded even further by the rating agencies.

BlueBay Asset Management also recommended buying high yield bonds in a recent report, pointing out that they tend to give better returns than stocks during recessions and over the subsequent years of recovery. Following times of stress, junk has given average annualized returns of 37%, 26%, and 21% over the next 12, 24, and 36 months.

A tempting return?
A tempting return?
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