Anfield Fixed Income Market Update: November 2022
Within the universe of high-yield (HY) fixed income, there are two important concepts: that of rising stars and fallen angels. Rising stars are bonds that were issued as HY (rated below BBB-) but have since improved their credit profile, reducing the risk of default and now resembling characteristics closer to those of investment grade (IG), also known as high-grade (HG) securities (BBB- and above rated instruments). Rising stars also include companies that were previously IG, downgraded to HY, but have the potential to return to IG. While these rising stars are still within the HY universe, the market is attaching a good probability that they will be upgraded to HG sometime in the future. Fallen angels, on the other hand, are fixed income securities that were once considered HG but have since been categorized as HY due to a reduction in the issuer’s credit rating. From an active management perspective, investing during a security’s temporary fallen angel status has the potential to benefit investors through generating higher yield from a firm that is more likely to meet its obligations.
In November, JP Morgan forecasted $160bn of debt to be upgraded from HY to HG through 2023 (rising stars) while only a modest $15bn of debt to fall from HG to HY (fallen angels) over the same period. Looking back, in 2022 the ratio of rising star to fallen angel was a healthy 8:1 with YTD results of $54bn of rising stars, the highest since 2013, and just $7bn of fallen angels. Looking out at the few remaining months of the year, the bank remains optimistic for an additional $38bn of upgrade activity led by the Energy sector. Looking deeper at the industry level, the largest drivers of JP Morgan’s forecast are in Energy ($59bn), Autos ($49bn), and Cable/Satellite ($17bn) while fallen angels may come from Healthcare ($15bn) and Autos ($10bn) through 2024. Indeed, throughout this year JP Morgan has found clear evidence of such positive ratings trends as upgrades within HG credit reached $374bn while the pace of downgrades has been $144bn, or a 3:1 ratio. Suffice it to say, net ratings changes as a percentage of the HG market coming in at the highest level since 2007 at +4.1% is a good indicator for the near-term future of this market in our opinion.
Such an evolving fixed income universe reinforces the importance of active management to best identify and try and capture the excess yield that may be sitting on the boarders between HY and HG debt. While the possible recession dominating the news cycle may prove to be a headwind to such forecasts, the emphasis on quality detail-oriented analysis and research at Anfield gives us the confidence to make the informed decisions we believe are necessary to capture such phenomena. For example, in our Universal Fixed Income strategies, we continue to like—and have liked for a while—lower-rated IG (BBB- or BBB) and higher-rated HY (BB- or better). One potential rising star where we have a large overweight is Ford Motor and Ford Credit (Ba2/BB+/BB+), a company we’ve been bullish on for a while. In sum, let your money work smarter, not harder!
Source: JP Morgan
Current Fixed Income Positioning
Universal Fixed Income Strategies: Benchmark agnostic and line-item bond security portfolios looking to highlight our best ideas in bond space
Dynamic Bond strategy: Benchmark aware to the Bloomberg Barclay’s Aggregate Index and is a top-down macro-focused ETF of ETFs.
“Anfield Affection Gauges”: What fixed income sectors & exposures do we like, and what do we dislike?
Current Fixed Income Positioning Definitions
Duration represents the current value for each of the funds and indices noted
Curve represents where each of the funds and indices are positioned on the yield curve
Government represents the percentage allocated to Government bonds within the funds and indices
Credit represents the percentage allocated to Investment Grade and High Yield Credit within the funds and indices
MBS represents the percentage allocated to Mortgage-Backed Securities within the funds and indices
Yield (YTM) represents the Yield to Maturity of the funds and indices
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