As Junk Bond Defaults Rise, Mitigate Risks With These Options

A report by Schiff Gold noted that as interest rates remain elevated, corporate defaults have been on the rise. As such, investors may want to consider staying on the side of investment-grade debt until credit risks subside.

"Corporate bond defaults were up massively in 2023, especially for high-risk junk debt, and the trend is continuing this year at a pace not seen since the 2008 global financial crisis," the report mentioned.

In the previous year, S&P Global Ratings noted that corporate bond defaults came in at an alarming rate of 80%. The start of 2024 has been met with record issuance as bond investors are looking to lock in higher yields now before rate cuts eventually take place.

Despite the defaults, the attractive yield is still drawing in bond investors, but for the more risk averse, there are investment-grade options to consider. That's especially the case of more defaults occur in 2024 as the higher-for-longer interest rate narrative could continue if inflation keeps running hot.

"Demand remains strong for junk bonds and hybrid debt, but for companies with poor liquidity, poor to negative cash flow, and/or an outsized existing debt burden, the result is a compelling setup for even more defaults in 2024," the report added.