Viktor Aheiev
Fallen angels outperformed the broad high yield market in October; though there were no new fallen angels or rising stars in October, Ford is expected to be removed from the index in November.
Fallen angels (as represented by the ICE US Fallen Angel High Yield 10% Constrained Index, “H0CF”) outperformed the broad high yield market (as represented by the ICE BofA US High Yield Index, “H0A0”) by 0.26% in October (-0.98% vs -1.24%) primarily due to spread movements, as lower rated issuers saw greater spread widening than higher quality bonds. Yields continued moving upwards amid continued strong U.S. economic growth and concerns around fiscal spending and U.S. debt issuance, with the 10Y finishing the month at 4.88%. In early November, the U.S. Federal Reserve (Fed) kept the target range for the Fed Funds at 5.25% to 5.50% for the second time in a row, potentially indicating that the current hiking may be over but leaving their options open if needed, as the economy grew at strong pace during Q3.
In terms of flows, high yield U.S. listed corporate ETFs saw approximately $5.4bn in outflows in October, bringing the 3-month net outflows to approximately $8bn. Treasury ETFs continued to see large inflows with $21.1bn this past month; ultrashort funds continued to see the most inflows, but there were some inflows into intermediate and long duration products, as well. With the Fed keeping rates unchanged, there is potential for the mid/long end of the curve to continue picking up more inflows, although investors betting on declining long-term yields did not fare well over the past six months.
Recap of Large Rising Stars: Occidental Petroleum and Ford
This year, we have seen a boost in rising stars ($34,250m in market value), most of which were downgraded in 2020. The two largest rising stars have been Occidental Petroleum and Ford, which is expected to be removed from the index next month.
Occidental Petroleum (OXY):
- Downgraded April 2020 as part of the energy downgrade due to the sharp drop in oil prices; entered the index with a price of $71.76, adding $25,844 of par.
- Upgraded May 2023 with improvement in credit metrics, stemming from the combination of incremental de-leveraging, along with anticipated improvements in earnings in the chemicals and midstream segments, and exiting the index with a price of $93.82, removing $9,975 of par.
- During its time in the index, OXY provided a cumulative total return of approximately 43% and price return of approximately 23%, vs. the fallen angel index total return of approximately 1% and price return of approximately 19%.
Ford (F):
- Downgraded April 2020 as operations in most regions were shut down; entered the index with a price of $85.87, adding $21,520 of par.
- Upgraded the last day of October, which, due to the selection of underlying constituents for month end rebalance being three business days before the last day of the month, is expected to be removed from the fallen angel index on November 30, 2023.
- As of October 31, 2023, Ford’s price was $89.95, par $8,106m, providing a cumulative total return of approximately 24% and price return of approximately 5% since index entry vs. the fallen angel index total return of approximately 20% and price return of approximately -1%.
Source: ICE Data Services, VanEck.
Fallen Angels Overall Statistics: Fallen angel yields increased by 32bps to 8.34%, surpassing by 1bp the elevated level seen at the end of March 2020, however, spreads were 447bps higher than they are currently (327 vs 774). Broad HY saw an increase in yield of 27bps, from 8.94 to 9.48. Broad HY spreads widened 10% while fallen angels only widened by 4%, which was the main contributor to fallen angel outperformance this past month. Fallen angel market value decreased despite no fallen angels, rising stars or defaults, as six issues were removed due to their maturity being less than 12 months away. Broad HY did see two issuers default in October (Rite Aid (OTC:RADCQ) and Akumin (OTC:AKU), with par amount of $2,019m), totaling thirteen issuers that have defaulted so far this year with par amount of $15,391m. Ride Aid and Akumin were not part of the fallen angel index, resulting in Bed Bath & Beyond (OTCPK:BBBYQ) being the only issuer in the fallen angel index that has defaulted so far this year.
| Fallen Angel | Broad HY | |||||||||
| 12/31/22 | 3/31/23 | 6/30/23 | 9/30/23 | 10/31/23 | 12/31/22 | 3/31/23 | 6/30/23 | 9/30/23 | 10/31/23 | |
| Yield to Worst | 7.49 | 7.08 | 7.35 | 8.02 | 8.34 | 8.98 | 8.49 | 8.56 | 8.94 | 9.48 |
| Effective Duration | 5.45 | 5.30 | 4.98 | 4.90 | 4.93 | 4.04 | 3.83 | 3.65 | 3.64 | 3.67 |
| Full Market Value ($mn) | 112,854 | 114,776 | 84,590 | 78,279 | 74,096 | 1,199,909 | 1,234,319 | 1,218,316 | 1,201,541 | 1,174,212 |
| OAS | 337 | 325 | 297 | 314 | 327 | 481 | 458 | 405 | 403 | 442 |
| No. of Issues | 212 | 206 | 163 | 159 | 153 | 1,927 | 1,916 | 1,870 | 1,872 | 1,854 |
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 fund performance. It is not possible to invest in an index.
New Fallen Angels: None in October.
| Month-end Addition | Name | Rating | Sector | Industry | % Mkt Value | Price |
| February | Entegris Escrow Corp (ENTG) | BB1 | Technology & Electronics | Electronics | 1.39 | 90.92 |
| March | First Republic Bank (OTCPK:FRCB) | B3 | Banking | Banking | 0.40 | 54.63 |
| March | Nissan Motor Acceptance | BB1 | Automotive | Auto Loans | 2.57 | 87.19 |
| March | Nissan Motor (OTCPK:NSANY) | BB1 | Automotive | Automakers | 5.49 | 92.98 |
| April | Crane NXT (CXT) | BB3 | Capital Goods | Diversified Capital Goods | 0.24 | 70.99 |
| April | Rogers Communications (RCI) | BB2 | Telecommunications | Telecom – Wireless | 0.65 | 90.35 |
| April | Western Alliance Bancorporation (WAL) | BB1 | Banking | Banking | 0.44 | 76.39 |
| August | Associated Banc-Corp (ASB) | BB1 | Banking | Banking | 0.33 | 95.69 |
| August | Valley National Bancorp (VLY) | BB1 | Banking | Banking | 0.33 | 79.84 |
| September | Brandywine Operating Partnership L.P. (BDN) | BB1 | Real Estate | REITs | 1.86 | 87.29 |
| September | Port of Newcastle Investments Financing Pty Limited | BB1 | Transportation | Transport Infrastructure/Services | 0.36 | 82.79 |
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 fund performance. It is not possible to invest in an index.
Rising Stars: None in October.
| Month-end Exit | Name | Rating | Sector | Industry | % Mkt Value | Price |
| February | Autopistas Metropolitanas de Puerto Rico LLC | BB1 | Transportation | Transport Infrastructure/Services | 0.35 | 100.49 |
| February | Nokia Corp. (NOK) | BB1 | Technology & Electronics | Tech Hardware & Equipment | 0.47 | 97.50 |
| March | Western Midstream (WES) | BB1 | Energy | Gas Distribution | 5.27 | 90.44 |
| April | Sprint Capital Corp. | BB1 | Telecommunications | Telecom – Wireless | 4.70 | 114.25 |
| May | Mattel Inc. (MAT) | BB2 | Consumer Goods | Personal & Household Products | 0.45 | 85.32 |
| May | Nissan Motor Acceptance | BB1 | Automotive | Auto Loans | 2.67 | 85.12 |
| May | Nissan Motor (OTCPK:NSANY) | BB1 | Automotive | Automakers | 5.57 | 88.49 |
| May | Occidental Petroleum Corp (OXY) | BB1 | Energy | Energy – Exploration & Production | 8.69 | 93.82 |
| June | APA Corp. (APA) | BB1 | Energy | Energy – Exploration & Production | 3.84 | 82.69 |
| July | Western Digital Corp. (WDC) | BB1 | Technology & Electronics | Tech Hardware & Equipment | 0.99 | 76.97 |
| August | Howmet Aerospace Inc. (HWM) | BB1 | Capital Goods | Aerospace/Defense | 2.04 | 99.55 |
| September | Patterson-UTI Energy Inc. (PTEN) | BB1 | Energy | Oil Field Equipment & Services | 1.07 | 90.37 |
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 fund performance. It is not possible to invest in an index.
Fallen Angels Performance by Sector: Only the Retail sector posted a positive return for October (+0.39%) but it was not enough to offset the negative performance of the other sixteen sectors, despite having the sixth largest exposure in the fallen angel index. There were only small changes to sector exposure with the lack of fallen angels and rising stars, however, the Transportation and Real Estate sectors saw a decrease of more than 1% due to some relatively large issues from Delta and Service Properties Trust being removed from the index due to their maturity being less than 12 months away. The continuous volatility on the long part of the curve keeps driving bond prices lower. The fallen angel index now has 16% in the $70s (up from 9% last month), 76% in the $80s (up from 66%) and just 8% (down from 25%) in the $90s, allowing for a potential higher price appreciation if rates decrease.
| Wgt (%) | OAS | Price | Total Return (%) | |||||||||||||
| 12/31/21 | 3/31/23 | 6/30/23 | 9/30/23 | 10/31/23 | 12/31/21 | 3/31/23 | 6/30/23 | 9/30/23 | 10/31/23 | 12/31/21 | 3/31/23 | 6/30/23 | 9/30/23 | 10/31/23 | MTD | |
| Automotive | 10.00 | 18.06 | 10.00 | 10.00 | 10.00 | 262 | 246 | 211 | 206 | 205 | 91.35 | 92.21 | 92.99 | 91.16 | 89.95 | -0.87 |
| Banking | 3.81 | 3.99 | 3.20 | 4.34 | 4.54 | 302 | 415 | 376 | 279 | 301 | 96.85 | 87.61 | 88.57 | 92.02 | 89.88 | -1.79 |
| Basic Industry | 1.36 | 1.33 | 1.93 | 1.92 | 2.03 | 226 | 227 | 168 | 178 | 194 | 92.17 | 93.85 | 94.44 | 93.53 | 92.45 | -0.75 |
| Capital Goods | 5.12 | 5.10 | 7.66 | 5.86 | 5.60 | 279 | 240 | 195 | 250 | 250 | 95.01 | 98.54 | 96.85 | 92.44 | 91.34 | -0.18 |
| Consumer Goods | 3.07 | 3.00 | 3.62 | 3.82 | 4.04 | 275 | 255 | 298 | 271 | 326 | 88.90 | 91.27 | 89.31 | 88.24 | 86.98 | -0.89 |
| Energy | 27.93 | 22.16 | 15.28 | 14.45 | 14.63 | 293 | 303 | 297 | 288 | 294 | 88.13 | 90.05 | 88.74 | 87.48 | 85.20 | -1.74 |
| Financial Services | 0.65 | 0.64 | 0.94 | 0.98 | 1.00 | 540 | 506 | 459 | 420 | 527 | 77.20 | 80.27 | 80.92 | 79.51 | 74.92 | -5.15 |
| Healthcare | 3.02 | 3.03 | 4.33 | 4.62 | 4.88 | 362 | 304 | 281 | 299 | 298 | 83.56 | 86.47 | 86.82 | 84.72 | 83.31 | -1.17 |
| Insurance | 0.85 | 0.82 | 1.15 | 1.20 | 1.25 | 347 | 364 | 358 | 366 | 375 | 92.10 | 92.99 | 91.39 | 87.81 | 86.20 | -1.24 |
| Leisure | 7.88 | 7.79 | 10.42 | 7.87 | 8.32 | 325 | 243 | 182 | 257 | 276 | 89.95 | 93.25 | 93.34 | 89.37 | 88.79 | -0.20 |
| Real Estate | 5.13 | 4.72 | 6.22 | 8.37 | 7.15 | 697 | 701 | 602 | 660 | 775 | 79.46 | 80.72 | 80.99 | 80.86 | 76.74 | -0.85 |
| Retail | 5.67 | 5.49 | 7.79 | 7.98 | 7.99 | 471 | 474 | 354 | 368 | 352 | 73.75 | 74.72 | 82.35 | 78.48 | 77.36 | 0.39 |
| Services | 0.38 | 0.37 | 0.53 | 0.57 | 0.61 | 388 | 368 | 356 | 309 | 307 | 87.11 | 89.89 | 88.62 | 88.75 | 88.12 | -0.22 |
| Technology & Electronics | 4.20 | 4.67 | 6.21 | 5.57 | 5.82 | 327 | 287 | 269 | 262 | 260 | 85.47 | 88.19 | 86.89 | 87.23 | 85.84 | -1.11 |
| Telecommunications | 11.91 | 11.68 | 10.61 | 11.53 | 12.00 | 423 | 433 | 475 | 418 | 432 | 90.04 | 91.39 | 84.92 | 84.95 | 82.99 | -1.60 |
| Transportation | 2.10 | 1.78 | 2.59 | 3.14 | 1.98 | 279 | 231 | 150 | 203 | 241 | 90.49 | 92.69 | 94.75 | 91.70 | 88.14 | -0.31 |
| Utility | 6.93 | 5.38 | 7.52 | 7.77 | 8.17 | 213 | 206 | 165 | 175 | 173 | 89.95 | 90.19 | 89.90 | 86.28 | 85.08 | -0.97 |
| Total | 100 | 100 | 100 | 100 | 100 | 337 | 325 | 297 | 314 | 327 | 87.91 | 89.51 | 88.78 | 86.69 | 84.94 | -0.98 |
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 fund performance. It is not possible to invest in an index.
Fallen Angels Performance by Rating: Higher quality outperformed in October, aside from the CC- rated bucket and one issuer (Diversified Healthcare Trust (DHC)). October marks the second month so far this year where higher quality (BB-rated bucket within the fallen angel index) outperformed. The CCC bucket has outperformed over 5 months while Single-B has done so over 3 months to date.
| Wgt (%) | OAS | Price | Total Return (%) | |||||||||||||
| 12/31/21 | 3/31/23 | 6/30/23 | 9/30/23 | 10/31/23 | 12/31/21 | 3/31/23 | 6/30/23 | 9/30/23 | 10/31/23 | 12/31/21 | 3/31/23 | 6/30/23 | 9/30/23 | 10/31/23 | MTD | |
| BB | 87.00 | 87.08 | 83.01 | 81.02 | 81.82 | 284 | 281 | 256 | 257 | 266 | 90.02 | 91.51 | 89.83 | 87.94 | 86.40 | -0.91 |
| B | 10.95 | 10.37 | 13.31 | 15.03 | 14.08 | 608 | 500 | 405 | 493 | 530 | 82.50 | 85.35 | 89.55 | 86.37 | 83.70 | -1.12 |
| CCC | 1.98 | 2.50 | 3.68 | 3.43 | 3.55 | 1,020 | 1,014 | 852 | 810 | 841 | 60.88 | 64.60 | 68.55 | 67.01 | 64.84 | -2.31 |
| CC | 0.52 | 0.55 | 835 | 846 | 72.91 | 72.53 | 0.03 | |||||||||
| Total | 100 | 100 | 100 | 100 | 100 | 337 | 325 | 297 | 314 | 327 | 87.91 | 89.51 | 88.78 | 86.69 | 84.94 | -0.98 |
Source: ICE Data Services, VanEck. Fallen Angels: ICE US Fallen Angel High Yield 10% Constrained Index. Past performance is no guarantee of future results. Index performance is not representative of fund performance. It is not possible to invest in an index.
Important Definitions and Disclosures
Please note that VanEck may offer investments products that invest in the asset class(es) or industries included in this blog.
This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities, financial instruments or digital assets mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, tax advice, or any call to action. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results, are for illustrative purposes only, are valid as of the date of this communication, and are subject to change without notice. Actual future performance of any assets or industries mentioned are unknown. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third party data. The information herein represents the opinion of the author(s), but not necessarily those of VanEck or its other employees.
A fallen angel bond is a bond that was initially given an investment-grade rating but has since been reduced to junk bond status.
High yield bonds may be subject to greater risk of loss of income and principal and are likely to be more sensitive to adverse economic changes than higher rated securities.
A rising star is a high yield bond that is upgraded to investment grade.
Duration is an estimate of how much the value of a bond portfolio would be affected by a change in prevailing interest rates. The longer a portfolio’s duration, the more sensitive it is to changes in interest rates.
There are inherent risks with fixed income investing. These risks may include interest rate, call, credit, market, inflation, government policy, liquidity, or junk bond. When interest rates rise, bond prices fall. This risk is heightened with investments in longer duration fixed-income securities and during periods when prevailing interest rates are low or negative.
Index returns are not Fund returns and do not reflect any management fees or brokerage expenses. Certain indices may take into account withholding taxes. Investors cannot invest directly in the Index.
ICE BofA US High Yield Index (H0A0, “Broad HY Index”), formerly known as BofA Merrill Lynch US High Yield Index prior to 10/23/2017, is comprised of below-investment grade corporate bonds (based on an average of various rating agencies) denominated in U.S. dollars.
ICE US Fallen Angel High Yield 10% Constrained Index (H0CF, “Fallen Angels Index”) is a subset of the ICE BofA US High Yield Index and includes securities that were rated investment grade at time of issuance.
Fallen Angel U.S. High Yield index data on and prior to February 28, 2020 reflects that of the ICE BofA US Fallen Angel High Yield Index (H0FA). From February 28, 2020 forward, the Fallen Angel U.S. High Yield index data reflects that of the ICE US Fallen Angel High Yield 10% Constrained Index (H0CF). Fallen Angel U.S. High Yield index data history which includes periods prior to February 28, 2020 links H0FA and H0CF and is not intended for third party use.
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