Fallen Angels are bonds that were originally rated investment grade, which were then downgraded to below investment grade. This metaphor represents the downgrade of a security from investment grade to high-yield bonds, as such bonds are typically in the high-yield segment, i.e., rated between BB+ and BB-, they differ from lower grade bonds, such as B+ and below, with relatively high credit quality.
Due to strict investment policies, not all institutional investors can have bonds in their portfolios rated below investment grade. Thus, as a result of a credit rating downgrade from investment grade to below investment grade, institutional investors are forced to sell these bonds, and these securities will sell lower than if they were traded without the influence of institutional investors' sales, which is why there is an additional risk premium.
And now let's understand where the yield comes from. So, the yield of a corporate bond can be represented as a yield consisting of several elements, such as maturity premium, expected inflation, interest rates, and credit risk premium, and as a result, changes in any of these factors will affect the final yield. This can be represented in the following formula:
Yeild on Corporate Bond = (Maturity Premium + Inflation Premium + Real Rate) + Credit Spread
Thus, investors in corporate bonds mainly focus on the credit spread, which is the difference between the yield of a corporate bond and the yield of a risk-free bond with a corresponding duration. The credit spread (corporate spread) is compensation for the issuer's default risk and a small liquidity premium. When a bond is downgraded from investment grade to a high-yield bond, which includes Fallen Angels, its yield increases primarily by compensating for the risk of default.
Well, these securities allow not only to diversify the investment portfolio, but also to provide additional yield over long periods of time, i.e. practically providing a yield at the level of stocks, while possessing the risks inherent in instruments with a fixed yield.