Bond investors beware fallen angels

AXA Investment Managers /

02-02-2018

Investment grade (IG) credits would typically ‘jump to default’ only under unusual circumstances, like fraud in the case of Enron and Parmalat, or an outright systemic meltdown as was the situation with banks during the global financial crisis. So in comparison to default risk borne by high yield (HY) investors, rating deterioration is a more dominant risk investment grade investors. A corporate that moves from IG to HY rating is referred to as a fallen angel, while the reverse transition from HY to IG is referred to as a rising star.

Fallen angel risk can be quite contained over prolonged periods of time but it can also flare up and affect IG returns materially. The credit environment remains benign, with the upgrade to downgrade ratio still positive at this point in the cycle. Fallen angel volumes have declined by circa $50bn in US dollar credit and by circa $60bn equivalent in euro credit (Exhibit 2, top), translating to a twenty year lows in USD credit and a ten year low in EUR credit as a share of the HY market.

Bond Corporate