Barclays Plc anticipates a significant wave of 'fallen angels' in 2025, projecting between $40 billion and $60 billion worth of companies to lose their investment-grade ratings. This would mark the highest level in nearly a decade, excluding the anomaly of 2020 due to the Covid-19 pandemic. This influx of debt into the US junk-bond market is largely attributed to soaring inflation, which has driven up operating costs for many American businesses. The market value of fallen angels, defined as bonds downgraded from investment grade to high yield, reached a peak of $287 billion at the end of 2020 and currently stands at $85 billion as of April 30, 2026, according to Bloomberg data.
Companies that become fallen angels are often well-known household names like Macy's, Kohl's, Nissan, and Centene. These firms typically operate in cyclical industries that are vulnerable to economic downturns. Oracle's debt, for example, recently began trading like junk, with bond and credit default swap spreads flaring up. Historically, the market tends to anticipate these downgrades, leading to a sharp price depression before official notices are released by ratings agencies.
This pre-downgrade selling pressure, often driven by investment-grade managers being mandated to sell non-investment-grade holdings, can cause bonds to become oversold. This creates potential entry points for high-yield investors, as fallen angels have historically shown a pattern of underperformance before a downgrade followed by outperformance in the months after. These bonds, initially issued as investment grade, often have longer durations and lower fixed-rate coupons than typical high-yield bonds, and the majority fall into the BB rating category, the highest quality within high yield.
Enhanced fallen angel strategies aim to capitalize on this post-downgrade recovery. For instance, the Bloomberg US High Yield Enhanced Fallen Angels Index allocates greater weight to more recently downgraded bonds and less to those downgraded 24 months or longer. This approach focuses on capturing the price recovery that often occurs shortly after a downgrade, as technical selling pressure eases and high-yield investors enter the segment. For example, the ANGL fund, which tracks the ICE US Fallen Angel High Yield 10% Constrained Index, has delivered a 75.04% total return over the last decade, outperforming the broader high-yield HYG fund's 57.35%.
