Kevin Corrigan, head of credit at Lombard Odier Investment Managers, explains how investing in ‘fallen angels' - issuers whose ratings transition from investment grade to high yield - allows investors to maintain positive returns in a rising yield environment.
Since government bonds generally offer meagre protection against rising yields, the natural tendency might be to loosen quality control, and buy high yield bonds which have ratings as low as C. But high yield bonds are a mixed bag – and they suffer from the normal bond market cap index distortions. The universe is small, in Europe it is worth only €273bn, compared to €1,503bn for investment grade. And despite a significant average annualised return (over 9%), they are volatile and can suffer significant drawdowns. Crossover zone The distinction between investment grade (BBB- and abo...
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