High-yield versus government bonds in a crash: income is not a cushion

High-yield bonds can finish a crisis window with a positive return while inflicting a substantial loss inside it. The euro iBoxx Liquid High Yield index gained 13.6% from September 2007 to September 2010, but fell 34.2% from its October 2007 peak to December 2008. Income and a later rebound did not provide a stable balance for someone needing to sell near that low.

In the two later windows the order reversed: high yield beat EUR-hedged global government bonds by 11.6 percentage points over January 2020–January 2023 and by 20.6 points over December 2021–December 2024.

The growth comparison uses terminal wealth over identical dates. Neither a smaller drawdown nor a more diversified mix is treated as an objective by itself; their relevance depends on the complete net return path.

The asset-class crash study reports these observations. Here we compare high yield with the same government-bond benchmark across all three windows with available credit data, then calculate the recovery hurdles.

Key takeaways

1. A positive crisis-window return did not prevent a deep interim loss. The euro high-yield index gained 13.6% over September 2007–September 2010 while suffering a 34.2% drawdown within the window.
2. Which bond type did better depended on the crisis. Government bonds beat high yield by 6.6 percentage points in the 2007–2010 window, then trailed it by 11.6 and 20.6 points in the two later windows.
3. Income, resale value and access to spending money describe different parts of the outcome. Coupons are paid only if the issuer can pay, and a fund has no maturity date at which its value returns to par.
4. Three sampled crises do not identify an optimal allocation. The summary data cannot separate the effects of duration, income and credit risk.

Use a consistent government-bond comparator

High yield is iBoxx € Liquid High Yield. Government bonds are FTSE WGBI Developed, hedged into euros (from March 2021, the EUR-hedged Xtrackers ETF on that index; see the methodology). Returns are nominal EUR index total returns, including reinvested income, before investor fees and taxes. The government benchmark is neither cash nor a single German Bund.

On €10,000 initially invested, high yield and government bonds ended the first window at €11,360 and €12,020. In the last window they ended at €10,820 and €8,760. High yield's relative terminal-wealth advantage in that last comparison was 23.5%: 10,820 / 8,760 − 1, rather than 20.6%.

The comparison CSV distinguishes relative wealth from percentage-point return gaps. Neither is a credit spread or a risk-adjusted return. All endpoint comparisons share dates; the two indices' worst drawdowns need not.

Why a bond can carry equity-related risk

A government bond's price depends on required yields and the issuer's creditworthiness. A corporate bond adds exposure to the company's ability to keep paying. High-yield issuers have lower credit ratings; changes in expected defaults, recoveries and liquidity can push prices down even when government yields fall.

Coupon payments are contractual obligations, subject to the issuer meeting them. They are not contractual gains triggered by an equity crash. A fund also replaces holdings, so it has no single maturity date at which its entire portfolio returns to par. See FINRA's explanation of high-yield bond risks.

In the 2008 window, high yield's monthly correlation with world equities excluding dividends was 0.76, versus −0.39 for the EUR-hedged government index. The figures describe co-movement in that sample. They do not establish how much of the credit loss came from defaults, changing spreads, interest rates or trading conditions.

Positive returns can conceal a demanding recovery

The fixed-window high-yield loss of 34.2% leaves €65.80 per original €100. Recovering needs 52.0% from that trough, using 1 / 0.658 − 1. Its October 2007 peak was regained in December 2009: 26 months after the peak and 12 months after the December 2008 trough.

The whole-history dataset starts at an earlier May 2007 peak and reports a 35.5% loss. That peak was regained only in January 2010, after 32 months. Its recovery hurdle was 55.0%. The figures differ because the fixed window begins in September 2007 and cannot retain a May peak.

The distinction is economically relevant: an investor entering before the window began had more capital to recover than one whose reference point started inside it. The two-clock recovery guide applies the same calculation across assets.

The 2022 comparison does not make high yield a universal refuge

Within December 2021–December 2024, high yield's maximum drawdown was 13.6%, from December 2021 to September 2022. Global government bonds' maximum was 17.3%, from December 2021 to October 2023. High yield had the smaller recorded loss and stronger endpoint return in this window.

That outcome is consistent with the importance of duration and income alongside credit exposure. The summary data do not contain the yield, duration and spread histories needed to attribute the difference. It would be unjustified to infer that credit risk itself caused the outperformance. The 2008-versus-2022 bond guide explains the fixed-payment repricing mechanism.

The “Covid” comparison also spans three years, including the 2022 rate shock. High yield's deepest loss there occurred in January–March 2020; government bonds' deepest loss, 18.1%, occurred in July 2020–December 2022. Those minima cannot be combined into an observed portfolio loss.

What you can do now

These checks use your fund documents and statements; none of them is a view on credit markets.

1. Find the credit rating mix of each bond fund. The factsheet shows how much is rated below BBB-, which is the high-yield part.
2. Note the fund's largest monthly fall since launch, alongside its yield. A yield describes income if issuers pay; the worst month describes the resale price you could have faced.
3. Check whether your government-bond funds are hedged into euros. The government series in this article needed correcting precisely because a hedged and an unhedged version of the same index diverged after 2021.
4. Separate the bond money you may need to spend from the rest. List planned withdrawals by date, since a fund's price on that date, not its income, determines what a sale raises.
5. See your bond allocation by type. The Copio app preview shows allocation by asset class across accounts, so government, corporate and high-yield bonds appear separately.