The following is my answer to a Quora question: “Do high yield bonds have a high default rate during a recession?”
Yes. These bonds have a lower credit rating, meaning they are not investment grade bonds. These bonds are not rated corporate papers, or sovereign bonds. Their underlying issuer either has a weak financial position, or is already heavily leveraged. To attract investors, they have to offer a higher yield. Most such bonds are essentially junk bonds. Let alone a recession, a high yield bond from a start-up might default simply because that start-up missed a fund-raising target. These are not debt instruments for the faint-hearted, or those with liquidity exposure.
Terence Kenneth John Nunis
[Shared with permission from: https://terencenunisconsulting.blogspot.com/2020/06/quora-answer-do-high-yield-bonds-have.html?m=1 ]
To add: fund houses seem to shift focus on investment grade bonds, especially in the current economic climate.
Investors should review their investment portfolio, and look into the need to reallocate funds to tide over the next 6 months, while keeping in mind the investment objectives.
