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: Quora Answer: Do High Yield Bonds Have a High Default Rate during a Recession?]
While the dividend rates of high yield bonds are enticing, we need to bear in mind that they come with some risk.
Yes, you can have high yield bonds as part of your investment portfolio, but it should not be the only bonds. Balance it with high grade bonds.