Bonds that lost their investment grade rating and came to be considered by the high-yield rating agencies exceeded $200 billion (about €166 billion) in 2020, the highest annual peak on record to date, according to BNY Mellon IM.
According to its data, some $1.5 trillion (€1.25 trillion) in bonds are rated ‘BBB-‘, the lowest rating before losing investment grade, so the firm expects the universe of so-called ‘fallen angels’ to increase in the current year.
The U.S. investment manager forecasts that in 2021 the trend that began with the Covid-19 crisis will continue due to economic uncertainty, the deterioration of corporate accounts and the transformations that industries will have to undertake after the economic crisis resulting from the pandemic.
In this context, BNY Mellon IM points out that including a small proportion, up to 2% or 3%, of bonds that have just lost their investment grade to ‘junk bond’ can be a source of extra yield for investors in 2021.
In the last year, fallen angels outperformed high yield bonds, returning 16% against 7%. Moreover, according to the asset manager, the default rate of bonds that have seen their rating fall is lower than that of the high yield category over the past five years.