ANGL: Higher Quality Outperforms Amid Volatility and Spike in Downgrades

Fallen angels (as represented by the ICE US Fallen Angel High Yield 10% Constrained Index, “H0CF”) finished Q1 on a strong note, outperforming the broad high-yield market (as represented by the ICE BofA US High Yield Index, “H0A0”) by 0.60% (1.55% vs. 0.95%). Increasing concern around U.S. trade policy and the expected negative impacts on economic growth and inflation drove high yield credit spreads to their highest levels since August 2024. Spreads have continued to widen in the first few days of April, very close to the October 2023 levels (high yield spreads ~450bps). Higher quality credit outperformed in this more uncertain environment, benefitting fallen angels relative to the broad market given their approximately 26% overweight to BB rated bonds and 6% underweight to CCC and below rated bonds. CCCs are now down -0.67% YTD after also underperforming in February, while higher quality, BB-rated bonds outperformed each month in the quarter at 1.29%, 0.72% and -0.56% respectively. Despite strong balance sheets and fundamentals overall, spread levels remain historically tight even after this recent widening, making high yield (especially lower rated bonds) vulnerable to continued price declines as the market digests the impact of tariffs and amid generally increased uncertainty. The 10-year U.S. Treasury yield fluctuated during the period and ended the quarter at 4.21%, a decline of 0.32%. The yield curve steepened in March, with a higher degree of rate cuts being reflected in the 2-year rate, but 2yr/10yr ended the quarter approximately where it began, and overall longer duration exposure outperformed.

BB- Rated Bonds Continue to Outperform

Source: ICE Data Indices as of 4/3/2025. 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: Fallen angels and broad high yield spreads widened in the first quarter of the year by 8bps and 63bps, respectively, as lower rated bonds exhibited wider spreads, particularly in March, with CCC & below rated bonds widening by 168bps. The widening reflects an escalating trade war and policy uncertainty, along with increased odds of a U.S. economic slowdown and higher inflation. Yields remained relatively high for both indices, although fallen angels finished the quarter slightly lower than the beginning of the year. Broad high yield, on the other hand, ended the quarter with wider spreads offsetting a decline in risk free yields, due to a 45% exposure to single-B or below-rated bonds. Fallen angel stats were impacted by the addition of new fallen angels equating to approximately 20% of added index weight. The new entrants (Nissan Motor Acceptance, Nissan Motor and Celanese US Holding) entered with lower yields and spreads relative to the overall index.

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: Aptiv PLC junior subordinated debt was downgraded by Fitch to BB+ from BBB- in January, as the company is planning to spin off its electrical distribution systems business into a separate company. Fitch stated that the downgrade aligns more closely with other similarly junior subordinated debt from other issuers. Over the last six months, the junior subordinated debt price decreased to $99.71 from $101.05. Within the Auto sector, S&P affirmed Ford’s BBB- rating in early February but revised their outlook to negative as its expansion over the next couple of years appears to be limited due to slower-than-expected progress on cost reduction, high labor costs and increasing pricing pressure. S&P stated that the negative outlook also reflects an increase in the risk of downgrade over the next 12-24 months, which could make Ford a fallen angel again, all else equal, as Moody’s credit rating is Ba1 while Fitch is BBB-. In February, Celanese U.S. Holdings was downgraded by Moody’s to Ba1 from Baa3, with a negative outlook, following the downgrade by S&P in November to BB+. The downgrade by Moody’s was due to concerns over the company's increased debt levels and potential challenges in maintaining strong cash flow amid market uncertainties and reflects apprehensions about Celanese's ability to reduce leverage while navigating fluctuating demand and pricing pressures in the chemical industry. Moody's and Fitch also downgraded Nissan to high yield with a negative outlook in February, due to declining profitability linked to weakening demand for its older vehicle lineup, especially in markets such as the U.S. and China. Moody’s also raised concerns about Nissan's ability to effectively execute its restructuring strategy, including workforce reductions and production cuts, amid ongoing global economic uncertainty while Fitch stated that persistently low profitability and a recovery trajectory that has been slower than anticipated.

Despite the concentration in Autos over the past few months, fallen angels have generally been idiosyncratic in nature. We are keeping an eye on signs for increased systemic downgrade activity, given the increased macro uncertainty following the recent tariff announcement.

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: Western Alliance Bancorp, a fallen angel from the regional banking crisis in early 2023, exited the index in February as Moody’s upgraded it back to investment grade, recognizing the company’s stronger capital position and improved risk management practices. The upgrade reflects increased resilience to potential financial stress and a more robust ability to navigate economic uncertainties. Back in April 2023, Western Alliance joined the fallen angel index with a price of $76.39 and now leaves at $93.75, providing an approximate 23% return over its time in the fallen angel index.

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: There were major changes to sector composition during the quarter. With Aptiv PLC and Nissan entering the index this past quarter, the Auto sector is again represented in the fallen angel index, following the exit of Ford in November 2023. Retail remains the highest sector weight, but the quarter saw significantly higher weights in the Autos and Basic Industry sectors, which are now greater than than 10% each. Real Estate continues to be the sector with wider spreads, and the only one above 400, and has continued to provide upside as the third best returning sector YTD, behind Retail and Healthcare. Retail and Real Estate, the largest sector overweights, were the top contributors to relative outperformance versus broad high yield during the quarter; Media and Telecommunications exposure detracted the most from relative performance.

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: There were no major changes in overall rating composition during the quarter with BB-rated bonds still the highest exposure within the fallen angels index. In terms of performance, Single-B rated bonds outperformed higher and lower quality bonds and was the only rating category to see tighter spreads. Security selection within and an overweight to BB bonds contributed to relative performance versus broad high yield, while selection within CC rated bonds detracted.

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.