An unusual recurrence in the markets is the ‘January effect’. This is the phenomenon of downgraded debt consistently outperforming in the first month of the year. This has taken place in 18 out of the past 21 years. 2024 is no different as the ICE US Fallen Angel High Yield 10% Constrained Index outperformed the ICE BofA US High Yield Index by 56 basis points. This year, the fallen angels index is composed primarily of real estate, retail, and telecom. 

JPMorgan sees some risks of further downgrades in the coming months. Currently, the high-yield market is collectively worth $1.3 trillion. Of this, $1.05 trillion is rated BBB- by at least one rating agency, and $111 billion is on negative watch by at least one agency. The bank sees risk of sector-specific weakness in real estate leading to more downgrades. It also notes a lesser risk of the economy slowing leading to more downgrades.

Over the last 3 months, 5 REITs have joined the fallen angels index and now comprise 12% of the index. Some issues are leverage, lower renewal rates, lack of recovery in office vacancies, and higher insurance costs. The sector is expected to remain under pressure, especially in commercial real estate, as $2.2 trillion in loans is expected to mature between now and 2027. 

Finsum: REITs are the largest component of the fallen angels’ index due to secular issues in commercial property and cyclical pressures created by high rates.