Today's Chart of the Day comes from an article in AAII.com (American Association of Individual Investors) and shows the average cumulative global corporate default rate from 1981-2021 in seven year spans.
A common misconception is that the yield you see from a bond portfolio is what you can expect to earn. However, this is a best case scenario as some of the bonds will ultimately default, causing a loss that reduces the yield.
In rough figures, if you take the weighted average default rate of all speculative/junk bonds and assume a 50% loss of principal of those bonds, over seven years this can reduce your total return by 2.9% annually.
The current yield to maturity on speculative/junk bonds is 7.6%. When you add in the historical loss of 2.9%, this reduces the total return to 4.7%, which happens to be the same yield of 4.7% in an investment grade bond with a similar maturity.
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