Investing in High Yielding Bonds

I read an interesting paper on the credit spreads from this website.

During a recession, the credit spread for a high yielding bond can widen to 10%. In good times, it can drop to 3%. This is for the US market.

If you buy a high yielding bond when the credit spread is 10%, you will be able to enjoy a 50% appreciation (my estimate) over a few years, when the credit spread narrows to 3%.

There is the risk that some of these bonds will fail. According to the paper, the risk represents only a proportion of the spread.

Conversely, if you buy a high yielding bond now (at a low credit spread), you stand the chance of losing 33% of your investment during a recession (due to the widening of the credit spread).

Lesson 1: The credit spread is too low now. You are not getting a sufficient reward for the risk. It is better to invest in government bonds.

Lesson 2: In a recession, when the credit spread is high, invest in a fund of high yielding bonds. You diversify the risk and enjoy a good yield (and high credit spread).