We know that it has been a fixed-income investor market. Thanks to the Federal Reserve, a higher interest rate environment led to higher yields, providing significant income opportunities for portfolios. Now that the Fed is starting to cut rates, fixed income investors may have the last laugh; price and capital appreciation are at hand.
But some fixed-income subsectors may perform better than others.
So-called Fallen Angel bonds could be one of them. The former investment-grade bonds, now junk bonds, offer ample high current yields and may be one of the best places to get capital appreciation as the Fed raises rates. For investors, ignoring Fallen Angels in the current environment may be a real mistake.
Downgraded To Junk
Truth be told, Fallen Angels at one time were the only “junk” bond around. Before the 1980s, the only real way to achieve junk status and credit ratings was to be a former investment-grade bond that slipped into hard times. That is basically what a Fallen Angel is.
When major credit rating agencies—S&P Global, Fitch, and Moody’s—do their periodic check on a company and re-evaluate their ratings, sometimes things are not that rosy. There could be a significant buyout, legal hassles, poor product performance, or simply too much debt. In that case, the agencies will have to lower the credit score.
If a firm’s bonds are well within the investment-grade group and move down a notch or two, nothing necessarily happens. Maybe the bond price falls a bit, or investors demand slightly more yield on the next bond issue.
But there is a defined line, determined by credit ratings, that separates investment-grade and high-yield/junk bonds. The problem is with the firms that straddle the line between investment-grade/high yield, with a rating of BBB/BBB-. Those former investment-grade issuers are now pushed into junk status.
Comfort Amid The Economic Slowdown
What is interesting is that fallen angels are perhaps in the sweet spot of the market. When these former investment-grade bonds move lower, there is ample selling pressure. No longer fitting an investment-grade mandate, mutual funds, pension funds, indices, and other investment vehicles are forced to sell. As a result, and simply because of selling pressures, fallen angels will often yield more than lower credit-rated junk and higher-rated investment-grade debt.
But their credit quality is still pretty decent. Moving one notch lower really does not change your ability to pay back debt in a meaningful way. More than 80% of the fallen angels market currently has a BB rating; that is the top level of junk and features very low default rates. 1
Where it gets exciting for fallen angels is in today’s environment.
The economy is slowing, data is deteriorating, and consumers are clamping down. That is a recipe that has led to rising volatility and market uncertainty. However, fallen angels’ higher yields amid still decent credit quality are very admirable in slowing economic environments. Investors can get stock-like returns without taking on the risks of lower-quality junk bonds or even stocks, for that matter.
Secondly, they win in slowing economic environments thanks to the Federal Reserve’s rate cutting to increase growth because Fallen Angels tend to have longer durations than other junk bonds.
According to BNY/Insight Investment, the Bloomberg U.S. High Yield Fallen Angel 3% Index has a duration of around five years versus just three years for the Bloomberg U.S. High Yield Corporate Index. These are not newly issued junk bonds, but rather former investment-grade bonds that have been downgraded to the junk category. Thanks to their better credit and lower cost of debt, investment-grade firms tend to lock in their bonds for longer, whereas higher-risk junk issuers do not have that luxury. 1
This works out wonderfully during rate-cutting periods. As the Fed cuts rates, bonds with longer durations see their prices rise by more than those with lower durations.
Since the U.S. fallen angel index launched in 2005, there have been four periods when rates were generally falling. According to Insight, during those periods, fallen angels outperformed junk by a considerable margin on a total return basis—yield and price gains. This chart sums up the asset manager’s findings for both rising and falling markets—with Fallen Angels winning in both.
Source: Insight Investment
You can see this in action today. Asset manager Van Eck reports that the ICE U.S. Fallen Angel High Yield 10% Constrained Index—another benchmark for the sector—managed to outperform the broader high yield market during the third quarter by 0.59% (2.99% versus 2.40%). This improves the lead for the entire year. What is significant about Q3? The Fed started cutting rates.
With potentially one more rate cut this year and a few in 2026, fallen angels could be a wonderful place to score capital gains. Even if the Fed is forced to pause, its current high yields and strong credit quality provide ample protection for portfolios.
Betting On These Unique Bonds
Given the uncertainty and how Fallen Angels handle environments like today’s, investors may want to consider them for their portfolios.
Now, unlike some areas of the high-yield market, fallen angels can be easier to grab than other junk bonds, but that still is not a task that most investors may want to undertake. Cobbling up a basket of these issues is a lot of legwork, especially when numerous Exchange Traded Funds (ETFs) make the job easy.
Fallen Angel Bond ETFs
These funds were selected based on their exposure to fallen angel bonds. They are sorted by their Year-To-Date (YTD) total return, which ranges from -0.6% to 2.7%. They have expense ratios between 0.15% and 1.02% and assets under management between $34 million and $3 billion. They are currently yielding between 4.5% and 6.3%.
| Ticker | Name | AUM | YTD Total Ret (%) | Yield (%) | Exp Ratio | Security Type | Actively Managed? |
|---|---|---|---|---|---|---|---|
| FALN | iShares Fallen Angels USD Bond ETF | $1.7B | 2.7% | 6% | 0.25% | ETF | No |
| XBB | BondBloxx BB Rated USD High Yield Corporate Bond ETF | $56M | 2.1% | 6.3% | 0.20% | ETF | No |
| ANGL | VanEck Fallen Angel High Yield Bond ETF | $3.03B | 1.8% | 6.3% | 0.25% | ETF | No |
| HYLS | First Trust Tactical High Yield ETF | $1.5B | 0.4% | 6.2% | 1.02% | ETF | Yes |
| LQDB | iShares BBB Rated Corporate Bond ETF | $34M | -0.6% | 4.5% | 0.15% | ETF | No |
All in all, with fallen angel bonds offering a compelling opportunity in today’s uneasiness, investors may want to consider them for their portfolios. If rates fall, they will provide ample capital gains to boost their returns. If they stay steady for a while, their current high yields and strong credit quality will protect investors. Ultimately, they are a top-quality fixed-income asset that should not be ignored.
Bottom Line
Fallen angel bonds offer investors a distinctive opportunity to enhance their yields and upgrade the overall quality of their bond holdings. Given the favorable current environment for appreciation, these bonds represent a compelling addition to a portfolio.
1 Insight Investment (2025-09). Systematic Insights: Do not forget fallen angels amid rate cuts
2 Van Eck (2025-10). Fallen Angels Outperform Again in Q3 Amid Fed Cut and Trade Noise
