Investment Grade Bonds Face Potential Wave of Fallen Angels

Roughly $100 billion in US dollar and euro investment-grade bonds are currently trading at spreads wider than the double-B junk curve. This trend signals a potential wave of fallen angels, referring to investment-grade companies that risk being downgraded to junk status.

Fitch Ratings and other analysts attribute this volatility to the end of the pandemic-era low-interest-rate environment and the arrival of the late credit cycle. Key drivers include rising financing costs, Middle East conflict, and the heavy debt accumulation companies have undertaken to fund artificial intelligence initiatives.

Specific high-grade companies such as Oracle Corp. and Stellantis NV have seen their debt trade near junk levels. Oracle's pressure stems from high spending on AI data centers, while Stellantis faces headwinds from Chinese competition. Other vulnerable sectors include chemicals, consumer-facing businesses, and private credit firms tied to the software industry. This instability follows previous downgrades, such as the one Paramount experienced earlier in 2024.