From Bond Vigilantes, April 28:
The coronavirus pandemic and low oil prices have led to a surge in ‘fallen angels’, companies downgraded from investment grade to sub-investment grade. Ford, Kraft Heinz, Renault and Marks & Spencer are amongst the issuers that have become fallen angels so far this year.
We often see price falls in such downgraded bonds. Investment grade (IG) and high yield (HY) are typically treated as separate silos in an investor’s portfolios, which can lead to significant turnover of bonds from IG portfolios to HY portfolios when an issuer is junked. Figure 1 below shows the price action of three recent fallen angels with Ford, which has the largest debt pile, falling the furthest. We can also see that the market often anticipates the rating action before the agencies act.
The relative size of the IG and HY markets, as shown in Figure 2 below, intensifies the price moves. BBBs now account for just under half of the euro IG market and is over four times the size of the European HY market. This isn’t a European phenomenon: US BBB accounts for 48% of the IG market, and the BBB market is over three times the size of the US HY market. This exacerbates the price movements as supply exceeds demand........MORE
