Fallen angels: The new high-yield bonds

Such companies and their bonds are known as “fallen angels,” reflecting their descent from the grace of investment-grade to high-yield status. Their emergence creates higher financing costs for the issuers, changes in the composition of indexes and the funds that seek to track them, challenges for high-yield markets that need to absorb them, and opportunities for active funds.

“Although a downgrade represents an increased risk of default, if issuers can arrest some of the business pressures they face, fallen angels can end up being relatively high-quality bonds that everyone in the high-yield market wants to own, as some of them will be candidates for an upgrade to investment grade in the future,” said Sarang Kulkarni, portfolio manager for Vanguard active global credit strategies.

How the investment-grade market has changed

In the last several years, bonds rated BBB—the lowest investment-grade classification on the scale of two of the three major bond-rating

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