Vanguard examines whether high-yield bonds deserve a place in diversified portfolios, framing them as a hybrid between equities and traditional fixed income. Despite higher yields and historical outperformance, their elevated default risk and equity-like behavior complicate allocation decisions, with results suggesting benefits depend heavily on what asset class they replace.
Junk or Jewel? Assessing The Role of High-Yield Bonds in a Diversified Portfolio
Vanguard
Kimberly Stockton
Research
17 Pages
Key Takeaways
Default Risk Tradeoff: High-yield bonds show a 2.81% average default rate versus 0.15% for investment grade, with cumulative losses reaching 21% for lowest-rated issuers post-default.
Hybrid Behavior Profile: Correlation with equities averages 0.61 versus 0.52 with corporate bonds, and volatility is 4.0x higher than investment-grade bonds but 30% lower than equities.
Portfolio Impact Depends: Adding high yield to a 60/40 portfolio can add 20 bps return or reduce risk by 70 bps, while Sharpe ratios improve up to 10.6% when replacing equities.
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