“Adventurous” usually isn't a word used in relation to fixed income investing, but with Treasury yields tumbling in the U.S. and other major global central banks paring interest rates, it might require some sense of adventure to find adequate yield.
What Happened
Early Wednesday, 10-year Treasuries hit a yield of 1.63%. The iShares 20+ Year Treasury Bond ETF TLT, one of the least risky bond funds out there, is the midst of a nine-day winning streak, underscoring the risk off mood permeating markets right now.
Although it's trading lower over the past week, the VanEck Vectors Fallen Angel High Yield Bond ETF ANGL is one way yield-thirsty investors can quench their thirst. The $1.1 billion ANGL tracks the ICE BofAML US Fallen Angel High Yield Index and has a 30-day SEC yield of 5.31%, or more than triple the yield on 10-year Treasuries.
Why It's Important
“Fallen angel bonds, or high yield bonds originally issued with investment grade ratings, have outperformed the broad U.S. high yield market so far this year,” said VanEck in a recent note. “We believe the current environment of central bank easing will remain supportive of fallen angels and that fallen angels may be attractive as we enter the later stages of the credit cycle.”
ANGL holds 201 bonds and while it is a junk bond fund, fallen angels typically have less representation the speculative CCC rating group than do bonds born as junk. Just over 6% of ANGL's holdings are rated CCC or CC, according to issuer data.
By comparison, the widely followed Markit iBoxx USD Liquid High Yield Index allocates about 10.4% of its weight to CCC-rated debt, but that benchmark's yield is roughly the same as ANGL's.
What's Next
ANGL's effective duration us 5.7 years, enough to put the fund in intermediate-term territory and enough to position the ETF to benefit from falling interest rates.
“Although the longer duration can be a headwind in rising rate environments, fallen angels have actually outperformed the broad high yield market in seven out of the last nine years in which interest rates rose significantly,” said VanEck. “This is generally explained by the timing of rate increases, which tend to come later in the economic cycle and may coincide with higher fallen angel volumes, as well as the historical tendency of credit spreads to tighten in times of stronger economic growth.”
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