High yield: spreads can be deceiving | Insight Investment

Last month we highlighted our paper projecting fallen angel downgrades would rise sharply in 2025.

Not even a month later, Moody’s downgrades created the two largest fallen angels since the pandemic, collectively migrating over $16bn to the Bloomberg US High Yield Corporate Index for its regular rebalancing at the start of March (Figure 1).

This is already around double the new fallen angel supply we saw in 2024 and about a third of our $50bn projection for 2025¹.

Figure 1: The two largest fallen angel downgrades since the pandemic happened over the last month²

We find new fallen angels have historically delivered attractive returns relative to existing high yield names after predictable periods of volatility. We believe that dedicated fallen angel strategies may be particularly well placed to extract the most value from them.

However, the natural follow-on question concerned investors often ask is if defaults will follow downgrades, with some concerned about “maturity walls” given the higher rate environment.

We believe these concerns are misplaced. The maturity wall in high yield is more of a maturity staircase. A modest ~$140bn is set to mature over the next two years, and almost 80% of it is single-B rated or above (Figure 2). CCC and below debt set to mature in the next two years makes up only 1.1% of the market, with only 0.5% trading at distressed levels.

Figure 2: The high yield maturity wall is more like a “maturity staircase”³

We believe the combination of resilient economic conditions, strong corporate fundamentals and a supportive technical backdrop result in a benign default outlook. Meanwhile, several BBB credits are teetering on the precipice of downgrade.

In our view, high volumes of debt downgrades but low levels of defaults could be a sweet spot for high yield and fallen angel investors.