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I have used high yield bond funds for part of my bond portfolio. They have made a lot more money than the lower risk bond funds I own, but I'm getting concerned about the risk of default in a slowing economy. How risky are high yield bond funds?

A high yield, or junk, bond is a bond issued by a company that is considered to have higher risk. Bonds with a "BB" or lower rating are considered to be speculative or have a higher risk of default. Individually high yield bonds can be very risky but the risk is minimized in a diversified portfolio. Also, some high yield bond funds have relatively high rated junk bonds, while others bottom fish at much higher risk.

The historical default rate for junk bonds is 4.9 percent. Last year 1.6 percent of junk-bond debt defaulted. I suspect a slower economy will lead to more defaults.

I have recommended the Vanguard High Yield Bond Fund for over a decade. I feel comfortable recommending it as it is the highest quality high yield fund. I don't expect the highest returns but I feel comfortable with the higher quality portfolio.

IMPORTANT DISCLOSURE: The specific content of this message is intended strictly for informational and educational purposes. Such content is not based on knowledge of any reader's individual needs or circumstances and should not be construed as investment or tax advice. Any investment or tax decisions made are ultimately the responsibility of the individual.

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