No. of Recommendations: 0
ndividual junk bonds are a bad risk, certainly. But a well-run fund, like Vanguard, Fidelity, some others, spreads the likelihood of failure of one or another individual--or even a few--holdings across the entire inventory of holdings, so that those one or a few failures don't materially hurt the fund or an investor in the fund.
There are good statistics online that detail default rates for various classes of bonds.
Of course, a bond "default" does not mean a 100% loss. Nonetheless:
- investment grade (AAA to BBB) bond default rate is 3-4%, climbing to 10-12% for lower (junk / high yield) bonds.
- more money will be recovered if an investment grade bond defaults, as opposed to a junk bond.
What you say has been true in the recent past before the cycle of rate hikes. Junk bond yields, defaults and spreads against treasuries all have been low. If interest rates remain high, all will climb sharply IMO. A couple of percentage points in yield are not worth it.
