NEW YORK — The bond market is on watch for a new wave of fallen angels as investment-grade debt from companies including Oracle Corp. and Stellantis NV trades near junk levels, signaling credit deterioration across the U.S. investment-grade segment.
Fallen angels are bonds issued with an investment-grade rating that later drop to junk status following a downgrade. The reclassification triggers mandatory selling by institutions whose mandates bar sub-investment-grade holdings — pension funds, insurers and index funds among them — flooding the market with supply and suppressing prices.
Approximately $50 billion in corporate debt is projected to cross that line in 2025, driven by economic pressure and elevated leverage. The scale is modest against 2020's roughly $197 billion in downgrades, but the direction of travel is what institutional credit desks are watching.
The 10-year Treasury yield climbed from 3.97 percent in February to 4.71 percent recently, a move that amplifies duration risk across the fallen angel universe. Fallen angel bonds typically carry longer duration than the broader high-yield market, making them more sensitive to rate moves — a structural disadvantage in a bear-steepening environment.
The VanEck Fallen Angel High Yield Bond ETF (ANGL), a $3.08 billion portfolio that tracks this credit segment, returned 14.90 percent over the past five years, or 2.90 percent annualized — trailing the iShares iBoxx High Yield Corporate Bond ETF (HYG), which returned 18.85 percent, or 3.58 percent annualized, over the same period. On a one-year basis, ANGL reversed that gap, posting a 5.33 percent return against HYG's 4.44 percent.
High leverage in sectors exposed to commodity cycles sharpens the downgrade risk. An energy producer absorbing sustained losses from falling oil prices, for example, faces the same ratings pressure that has historically produced clusters of fallen angels during stress periods.
Credit metrics and macroeconomic data will determine whether the 2025 downgrade cycle stays contained near the $50 billion projection or accelerates toward something larger.
