Over in the municipal-bond market, Citigroup Inc. strategists suggested on March 17 that the companies should “cut municipal issuers some slack for now (think of it as patriotic duty)…. Let’s remember, we are all equally stunned, and equally blameless, where this crisis is concerned.”

That’s just not how this works, though. The credit-rating companies will act as they see fit, even if it creates a wave of fallen angels. What could change, however, are mutual-fund requirements, which would allow funds that buy investment-grade securities to cling to fallen angels rather than offload them at fire-sale prices.

To get a sense of how crucial the difference can be between double-B and triple-B, consider the following three exchange-traded funds: The VanEck Vectors Fallen Angel High Yield Bond ETF (ANGL); the iShares iBoxx Investment Grade Corporate Bond ETF (LQD); and the iShares iBoxx High Yield Corporate Bond ETF (HYG). From ANGL’s inception in April 2012 through the end of February, it gained 84.6% to LQD’s 50.2% and HYG’s 48.5%. Even after this month’s huge tumble, it’s still up 40% in the past eight years, compared with about 21% for both LQD and HYG.

As Bloomberg Intelligence’s Eric Balchunas told me recently, this outperformance seems to prove that fallen angels drop in price more than their fundamentals would indicate. So even if all mutual-fund requirements aren’t as strict as we’re made to believe about selling downgraded bonds, there’s still enough rigidity out there for this strategy to profit. To be sure, ANGL has only existed up until now during boom times for credit markets, so it’s possible in a tougher environment it could face harsher losses, too.

Still, this idea of arbitraging away potential mispricing between two credit ratings for easy profit makes sense intuitively. To me, at least, it would be better for a mutual-fund company to launch a dedicated strategy to picking winners among the incoming fallen angels rather than rewrite the rules at the last minute for its investment-grade funds.

Or what about those unconstrained bond funds? A wave of downgrades and the messy trading that comes after are precisely the time that they’re supposed to back up the proverbial truck. Of course, it’s hard to do much of anything when confronted with an unprecedented stampede out of fixed-income funds.

Dramatic Fed intervention may steady some markets, but unless something changes —and, judging by the last two weeks, it very well could—the central bank won’t be there to save fallen angels. Which brave investors will step up?

This opinion piece was provided by Bloomberg News.

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