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- Fallen angels are bonds downgraded from investment grade to high yield, often creating forced selling and potential credit dislocations.
- Historical data shows fallen angels can recover after downgrade events as technical pressure eases and high yield investors enter the segment.
- Enhanced fallen angel strategies may help investors target post-downgrade recovery by emphasizing more recently downgraded corporate bonds.
Fallen angels, corporate bonds that were originally issued as investment grade and later downgraded to high yield, can offer a useful lens into how investors think about credit downgrades not only as a risk, but also as a potential source of opportunity.
While downgrades are typically associated with deteriorating credit quality of the issuing entity, they can also create market dislocations driven by the technical selling pressures that occur because of the downgrade.
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Such dislocations may create potential attractive entry points, especially in the period immediately following the downgrade. As investors navigate the credit landscape for differentiated income and yield, fallen angels present themselves as an opportunity set within a fixed income portfolio.
The opportunity may be especially pertinent as the higher-for-longer narrative has gained renewed relevance, with gepolitical tensions pushing oil prices higher, adding to inflation concerns and reducing expectations for near-term rate cuts.
This article looks at how investors can assess fallen angels within a fixed income portfolio, how downgrade-driven selling pressure can create price dislocations and why the post-downgrade recovery period has historically shaped the segment’s return profile.
What makes fallen angels different from original-issue high yield bonds?
Fallen angels start in the investment grade market before moving into high yield, which can give them a different issuer profile, structure and credit quality from original-issue high yield bonds. They have historically represented a broad array of sectors, with retail and energy the most prevalent during heightened downgrade cycles like in the summer of 2020.
Another common trait of fallen angel bonds is that they are typically well-known household names like Macy’s, Kohl’s, Nissan and Centene, as they tend to be centered around more cyclical industries that experience headwinds during market downturns. The market value of fallen angels reached a high of $287bn at the end of 2020 and currently resides at $85bn, based on Bloomberg data as of Bloomberg LP as of April 30, 2026.
Notable as well is that because fallen angels are originally issued as investment grade, their structural features can be quite different from their new high yield peers. Fallen angel bonds tend to have longer durations and lower fixed rate coupons compared to original-issue high yield bonds. The majority of fallen angel bonds are BB, the highest quality category of high yield.
How downgrade pressure can shape returns
As the market anticipates the downgrade of a fallen angel bond, investment grade (IG) managers typically sell out of these bonds prior to the downgrade event. Many managers are constrained by IG mandates and are precluded from holding HY securities in their portfolios or must track and IG index that will remove the fallen angel upon downgrade. This forced selling pressure has historically tended to overshoot the fundamental value of the fallen angel.
A look at the price behavior of fallen angel bonds in the months preceding the downgrade and following the downgrade shows significant underperformance leading up to the downgrade, followed by outperformance in the months following the downgrade.
The sharp price depression occurring prior to the downgrade reflects the market’s anticipation of the downgrade combined with the notion that ratings agencies can lag with their official notices, along with the quantity and velocity by which the IG holder must remove these names from their holdings by mandate. Many view the bonds at this point as being ‘oversold’.
As can be seen in Figure 1, the bonds begin recovering in price terms in the months following the downgrade, most sharply in the immediate months following downgrade.
In addition to the technical price correction, there are also fundamental reasons for fallen angels being supported post downgrade. As mentioned, most fallen angels are large brand names that have strong access to the capital markets, better than their HY peers, allowing their operations and business to continue to be funded. As they were IG before, they also typically operate with incentive to get upgraded back into high quality.
The pattern of pre-downgrade weakness and post-downgrade recovery that has repeated itself historically has contributed to a differentiated return profile of fallen angels as compared to the broader high yield market (Figure 2). Across multiple market cycles, fallen angels have historically outperformed the high yield market as well as its BB-rated cousin, presenting itself as a compelling opportunity for many.
Fallen angels – the timing effect
While fallen angels are a compelling segment within high yield, the timing of when the premium occurs is notable. As mentioned, much of the price appreciation occurs in the months immediately following downgrade, the phase in which the technical selling eases and high yield investors begin buying.
A greater emphasis on the newer fallen angels may provide more targeted exposure to the premium associated with the post-downgrade recovery. The Bloomberg US High Yield Enhanced Fallen Angels Index was designed with this dynamic in mind, allocating a greater weight to the more recently downgraded bonds, and less weight to the ‘older’ fallen angels.
Specifically, the index tilts the bonds downgraded within the last 12 months (on a rolling basis) by 1.5, enhancing the exposure to the price recovery that occurs shortly after downgrade. Additionally, the Index reduces the allocation to fallen angels that have been downgraded 24 months or longer, by a factor of 0.5.
The Bloomberg US High Yield Enhanced Fallen Angels Index seeks to capture the timing effect associated with fallen angels while also enhancing the phase that has been historically most prominent.
As can be seen from Figures 2, while the investment case for traditional fallen angels remains, we observe that the enhanced fallen angels segment offers additional outperformance over the period shown. However, past performance is not indicative of future results and multiple factors may have contributed to the difference in performance.
Capturing the post-downgrade recovery
Fallen angels represent a unique segment of the credit markets, coming from investment grade and now residing in high yield. The nature of credit investing often drives outsized selling of these bonds as they approach downgrade, deeming them “oversold”.
This dynamic has tended to create attractive entry points for high yield investors looking to capture the historically observed price recovery that occurs post downgrade. By emphasizing the immediate period following the downgrade, the Bloomberg US High Yield Enhanced Fallen Angels Index seeks to more directly capture the timing effect that has historically characterized this asset class.
- Invesco has launched the Invesco Bloomberg Enhanced Fallen Angels ETF, tracking the Bloomberg US High Yield Enhanced Fallen Angels Index (I40386), under the ticker IFLN.