Market Vectors’ international high-yield corporate bond portfolio manager Fran Rodilosso today commented on what he sees as the major themes and trends shaping the “fallen angels” segment of the U.S. high-yield corporate bond space. “Fallen angel” is a term used to describe a bond that was rated as investment grade at the time of its original issuance, but which has since lost its investment grade status. Currently, fallen angels account for approximately 15 percent of the U.S. dollar denominated high yield bond universe.
“We have already seen some high-profile fallen angels ‘re-ascend’ this year, known as ‘rising stars,’ including $8 billion in Ford Motor bonds and $700 million in Pioneer Natural Resources bonds,” said Rodilosso. “Rising Star” is the opposite of fallen angel, and describes a bond with a credit rating that has been upgraded and has the potential of becoming investment grade. “The overall ratio of upgrades to downgrades has decreased over the course of 2012, but we have not seen explosive growth in the number of bonds moving into the fallen angel category, at least not yet.”
“While I believe that we could see growth in the BofA Merrill Lynch U.S. Fallen Angel High Yield Index (H0FA), which underlies our Market Vectors Fallen Angel High Yield Bond ETF (ANGL), over the next six to twelve months,” continued Rodilosso, “I also think that if overall credit quality remains strong, the index has the potential to perform well relative to high-yield and crossover investment alternatives.”
Rodilosso pointed to the fact that in recent months some large U.S. banks, such as Bank of America and Citibank, have tendered for and called a significant amount of Tier 1 capital issues that were fallen angels ahead of regulatory changes taking effect next year. “I believe that these calls reflect the U.S. banks’ improving balance sheets,” he added.
“Still, according to Merrill Lynch, as of July 2012, there is $73 billion of investment grade bonds with a rating in the lowest investment grade category that are on negative outlook, i.e. fallen angel candidates,” continued Rodilosso. “That is almost twice the number of ‘rising star’ candidates. But despite the shift towards downgrades, default rates among all high yield issuers still remain far below the 4.5 percent historical average, though I believe they could tick up to the 3.0-3.5 percent range by the end of the year.”
Mr. Rodilosso, who joined the Market Vectors team earlier this year, has more than 20 years of senior level experience in emerging markets, high-yield debt research and portfolio management. He currently manages three Market Vectors high-yield corporate bond ETFs, Fallen Angel High Yield Bond ETF (NYSE Arca: ANGL), International High Yield Bond ETF (NYSE Arca: IHY) and Emerging Markets High Yield Bond ETF (NYSE Arca: HYEM).
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Please note that the information herein represents the opinion of the author and these opinions may change at any time and from time to time. Not intended to be a forecast of future events, a guarantee of future results or investment advice. Current market conditions may not continue. Non-Van Eck Global proprietary information contained herein has been obtained from sources believed to be reliable, but not guaranteed.
About Market Vectors ETFs
Market Vectors exchange-traded products have been offered since 2006 and span many asset classes, including equities, fixed income (municipal and international bonds) and currency markets. The Market Vectors family currently totals $23.6 billion in assets under management, making it the fifth largest ETP family in the U.S. and eighth largest worldwide as of June 30, 2012.
Market Vectors ETFs are sponsored by Van Eck Global. Founded in 1955, Van Eck Global was among the first U.S. money managers helping investors achieve greater diversification through global investing. Today, the firm continues this tradition by offering innovative, actively managed investment choices in hard assets, emerging markets, precious metals including gold, and other alternative asset classes. Van Eck Global has offices around the world and manages approximately $32 billion in investor assets as of June 30, 2012.
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