When the economy turns uncertain, I notice how quickly narratives change. One week, markets are calm; the next, everyone is talking about rising defaults, tighter liquidity, and the cost of borrowing. In periods like these, high yield corporate bonds often come back into focus. They can offer higher income than many mainstream fixed-income options, but the reason they offer that income becomes more visible during a downturn.

Why the reward can be meaningful

The clearest reward is the yield. When sentiment weakens, prices of riskier bonds can fall even if the issuer is still operating normally. That fall in price pushes yields higher. For an investor, this can create an opportunity—but only if the company has the ability to service its debt through the cycle.

In my experience, the “reward” in high yield is not just the coupon. If I buy a bond at a discounted price during stress and the issuer stabilises over time, there can also be price recovery. That combination—steady interest payments plus a potential rebound in value—explains why some investors deliberately look at high yield during downturns. The market is simply paying more for risk at that moment.

The risks that become sharper in a downturn

That said, the same environment that improves yields also makes weaknesses harder to hide. The first risk I watch is default risk. In a slowdown, revenues can soften, customers may delay payments, and margins may narrow. Interest payments, however, do not pause just because conditions are difficult. If the company’s cash flows are stretched, the bond’s risk rises quickly.

The second risk is refinancing risk. Many companies rely on borrowing again to repay old borrowings. When rates are high or credit markets are tight, refinancing can become expensive—or not available. A bond can look fine on paper, but if a large maturity is approaching and the issuer doesn’t have strong liquidity, the downside can arrive suddenly.

The third risk is liquidity risk for investors. In stressed markets, it may not be easy to exit at a fair price. Even if a bond is listed, buyers can disappear when risk appetite is low. That matters if I might need funds before maturity. It is one reason I avoid treating high yield as a “quick trade” in uncertain periods.

How I decide whether to invest

If I plan to invest in bonds during a downturn, I try to be more selective, not more aggressive. I start with the issuer’s ability to survive stress:

• Cash flow resilience: Will the business still generate cash if demand slows?
  
  
• Debt maturity schedule: Are major repayments due soon, or spread out?
  
  
• Interest coverage: Can earnings comfortably cover interest costs?
  
  
• Security and protections: Is the bond secured, and do covenants add discipline?
  
  
• Management behaviour: Has the company historically managed leverage conservatively?
  
  

I also pay attention to concentration risk. With high yield corporate bonds, diversification is not a “nice to have”—it is a practical guardrail. I prefer spreading exposure across issuers and avoiding excessive reliance on one sector that could be hit harder in the same downturn.

What I take away

In an economic downturn, high yield corporate bonds can offer attractive income, and sometimes even strong total returns if recovery follows. But the risk side is real: defaults, refinancing stress, and limited exit liquidity can all show up when markets tighten. When I invest in bonds, I treat high yield as a credit decision first and a yield decision second. That approach keeps the focus where it belongs—on quality, structure, and the ability to hold through volatility.