Fallen angels: When downgrades create opportunity

Key takeaways

• Fallen angels are corporate bonds, often issued by well-known companies, that have been downgraded from investment grade to high yield.
• Forced selling after a downgrade can push prices too low, creating opportunities as many fallen angels later recover and are upgraded back to investment grade.
• Historically, fallen angels have delivered stronger long-term returns than broad high yield and can enhance yield, quality, and diversification within a fixed income portfolio.

Fallen angels are corporate bonds that were once rated investment grade but have been downgraded to high yield. While the term may sound dramatic, fallen angels are a well-established segment of the fixed income market and have existed for decades.

Credit downgrades typically occur due to:

• A cyclical downturn
• An increase in the company’s leverage
• Sector-wide stress (e.g., energy in 2015, travel in 2020)
• Temporary earnings or cash flow pressure

Fallen angels, more so than most high yield issuers, tend to be household names. Examples of past fallen angels include Kraft Heinz, Ford, and Newell Brands, maker of some well-known products such as Rubbermaid containers, Sharpie pens, and Elmer’s glue.

Fallen angels often overshoot on the downside, as many investors are forced to sell their holdings within a short time frame due to regulatory or mandate guidelines (e.g., many investment-grade funds and mandates are prohibited from holding high yield debt). This can lead to sharp price declines unrelated to long-term fundamentals, creating mispriced opportunities.

Investors can also benefit from the “rising star” effect. Many fallen angels are “rising stars” – names that tend to be more frequently upgraded back to investment grade than existing high yield names.

Research shows that fallen angels have historically delivered stronger long-term returns than the broad high-yield universe.

^{Source: Morningstar Direct. In USD. As of October 31, 2025. Indexes and benchmarks used in this material are unmanaged and provided for general comparison only – they cannot be invested in directly. Past performance is not a guarantee or indicator of future results.}

Fallen angels offer the potential for:

• Return improvement – Fallen angels can capture mispricing opportunities after a downgrade and benefit from price appreciation after a subsequent upgrade to investment grade.
• Yield enhancement – Fallen angels’ allocation within a core fixed income allocation can increase portfolio yield.
• Relative credit quality improvement – Fallen angels are typically downgraded to a higher rating compared to broad-based high yield.

Fallen angels can be a complement to traditional high-yield allocations and act as a way to access high yield with a different risk profile (i.e., a quality tilt).

While fallen angels can offer attractive return and income characteristics, they can also experience periods of elevated volatility—particularly around downgrade cycles—making diversification and sizing important considerations.

Fallen angels represent a segment of the bond market driven by credit transitions. By focusing on bonds that fall from investment grade into high yield, the strategy seeks to take advantage of mispricing opportunities created by downgrades, forced selling, and subsequent normalization.

For investors, fallen angels can offer a blend of yield and potential price appreciation, making them a suitable complement and diversifier within a fixed income allocation, when implemented as part of a diversified portfolio.