Anticipating 2025: Potential Rise in Fallen Angel Bonds
Zach Anderson Dec 12, 2024 15:12
The bond market may see an increase in fallen angel bonds in 2025, driven by unique factors rather than systemic issues, according to VanEck.
The bond market could witness a surge in fallen angel bonds in 2025, primarily due to idiosyncratic factors rather than systemic weaknesses, according to VanEck. Nicolas Fonseca, CFA, highlights that the upcoming year may see a notable rise in bonds that were once investment-grade but have been downgraded to junk status.
Understanding Fallen Angels
Fallen angel bonds are those that have lost their investment-grade status and are now considered high yield or junk bonds. This shift often results from changes in the issuing company's financial health or broader economic conditions impacting its ability to maintain its credit rating.
Market Dynamics and Risks
High yield bonds, including fallen angels, are generally more susceptible to economic downturns and may pose a higher risk of income and principal loss compared to higher-rated securities. The option-adjusted spread (OAS) measures the yield difference between these bonds and risk-free U.S. Treasury rates, offering insight into potential returns and associated risks.
Indices and Performance
Various indices track the performance of these bonds. The ICE BofA US High Yield Index, formerly known as the BofA Merrill Lynch US High Yield Index, includes below-investment-grade corporate bonds denominated in U.S. dollars. The ICE US Fallen Angel High Yield 10% Constrained Index, a subset of this index, specifically tracks securities that were investment grade at issuance.
Investment Considerations
Investors considering fallen angel bonds should be aware of the potential risks and volatility. These bonds are sensitive to interest rate changes, and their performance can be significantly affected by shifts in economic conditions. It's crucial for investors to evaluate the investment objectives, risks, charges, and expenses associated with any fund before investing.
For further insights, visit the original source at VanEck.
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