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Understanding fallen angel bonds – a persistent opportunity in high yield
Ashton Parker
Head of Credit Research
Anando Maitra, PhD, CFA
Head of Systematic Research and Portfolio Manager
key takeaways.
Fallen angel bonds often show strong fundamentals but are mispriced – creating opportunities for credit investors to capture attractive spreads
Returns are typically driven by the ‘pull-to-par’ dynamic of price recovery and carry, rewarding sustained exposure
Not all fallen angels recover. We believe active management is essential in avoiding ‘falling knives’ that deteriorate in credit quality.
Many investors assume that a bond downgraded from investment grade (IG) to high yield (HY) is simply bad news. Not always.
In reality, these ‘fallen angels’ are often downgraded despite their credit fundamentals remaining intact. Therefore, at the point of downgrade they become attractively priced – creating a time-tested opportunity that has historically rewarded patient investors.
In this article, we explain what fallen angels are, why they tend to deliver stronger long‑term results than traditional HY bonds, and how an active approach to this credit segment can help investors capture their benefits more fully.
A fallen angel is a corporate bond that has descended from IG status into HY. This typically happens when a company faces short-term challenges, or economic or market conditions deteriorate and credit-rating agencies become more bearish.
Crucially, downgrades often prompt forced selling by investors, such as pensions and insurance funds, which are only allowed to hold IG bonds. This technical pressure can cause spreads to widen sharply, pushing prices to levels that misrepresent the issuer’s true creditworthiness.
Most fallen angels experience only a modest ratings decline – often from BBB‑ to BB+, meaning:
About 90% of the fallen‑angel universe is rated BB1, the highest tier of HY
These bonds typically retain stronger fundamentals than the broader HY market.
Because of this initial mispricing relative to credit fundamentals, fallen angels have historically outperformed not only IG bonds but also other BB‑rated and HY peers.
How can fallen angels improve a high yield portfolio?
Because of the performance and quality characteristics of fallen angels, increasing their weight within a HY allocation can meaningfully enhance portfolio robustness.
Two practical portfolio use cases include:
Part of a HY exposure
Fallen angels move in line with HY markets but have historically delivered superior performance. Adding them to an existing HY allocation can upgrade overall portfolio quality and improve return potential
Within IG portfolios
Including fallen angels can offset the impact of forced selling that occurs when a bond falls out of IG indices. It also enhances portfolio yield with minimal effect on the overall average credit rating.
Not all fallen angels recover. Some actually do show credit deterioration and continue to descend the ratings scale. These are so‑called falling knives.
Passive strategies, which replicate an index mechanically, must by definition hold every newly downgraded bond, including those whose fundamentals are weakening.
An active approach can avoid these pitfalls by:
Selecting fallen angels with strong recovery prospects – knowing the fundamentals of the issuer before the downgrade helps
Analysing company fundamentals in real time and excluding issuers whose credit quality is deteriorating.
This is the foundation of strategies such as LOIM Fallen Angels Recovery, which combines systematic screening, fundamental research and a specialised team dedicated to crossover and fallen‑angel credit.
FIG 3. Fallen angel ETFs lag high yield and investment grade passive vehicles4
Fallen angels are not distressed bonds. In contrast, they are mispriced opportunities mainly created by technical rules and volatility. For credit investors seeking enhanced returns, better quality and a compelling addition to HY or IG allocations, fallen angels can play a powerful role.
That said, an active approach remains essential to avoiding falling knives and unlocking the full potential of this attractive credit segment, in our view.
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[1] Source: LOIM, Bloomberg at March 2026.
[2] Source: Bloomberg Barclays indices and LOIM, July 2025. For illustrative purposes only. 1 Excluding EM; July 2025. 2 Awards and ratings may vary without notice. Past performance is not a guarantee of future results. The peer group methodology cited herein is provided for information purposes only and may be subject to change over time. No fund/benchmark/index is directly comparable to the investment objectives, strategy or universe of our fund. This document has been prepared by LOIM employees who are encouraged to raise assets for their strategy and may have a conflict of interest. Information relating to peer group methodology is available on request.
[3] Source: Bloomberg Barclays Indices and LOIM, as of July 2025. Past performance is not a guarantee of future results. Note: Cumulative returns averaged across all Fallen Angels between 1989 and 2024. Note that mark-to-market includes unrealised losses from price declines (such as from interest-rate rises). For illustrative purposes only.
[4] Source: Bloomberg Indices and LOIM as of July 2025. Past performance is not a guarantee of future results
important information.
For professional investors use only
This document is a Corporate Communication for Professional Investors only and is not a marketing communication related to a fund, an investment product or investment services in your country. This document is not intended to provide investment, tax, accounting, professional or legal advice.
