how to contain high yield bond risks?

[Spock]

I've never fished off the high yield bond pier before.

With yields so repressed/compressed by the central banks, one has to go all the way down to BBB rated bonds to get any sort of risk differential rate vs. CDs. The higher yielding BBB's appear to be crowded with emerging market companies or the credit/leasing arms of car companies (not the car companies themselves). By the time you scroll past those bonds the yields are right back down to just above CD-like yields on one step above junk rated bonds. A good chunk of BBB bonds (bottom end of investment grade) are reportedly one hiccup away from dropping to junk or should be ranked as junk now... cheap rates are the only thing keeping some of the zombies going.

That puts me into high yield as the only bond option that yields more than a CD. Heck of a state of affairs when you go from FDIC insured all the way down to junk ratings 26% default rates with only 1-1.5% rate differences (but dissimilar durations) to compensate for the risk.

To contain high yield risk, I was thinking of dipping into the very very short duration end of the pool. Durations of nothing over a year and probably less. And maybe only 3-5% of the portfolio.

Concept: Small (2-3) mix of maybe 2/3 BB/B and maybe 1/3 CCC of preferably household name secondary market corporate bonds with durations of 9ish months.

A current example might look like:
1/3 of $ JC Penney CCC 5.255% YTM matures 10/01/2019 (yikes! but it becomes a will it be bankrupt in 6 months?... side note: the 2020 bond is at 13+%!!)
2/3 of $ Lennar BB 3.466% YTM matures 11/15/2019
average maturity 0.58 years
Average Estimated Yield 5.748 per Fidelity bond tool

An alternative would be HY funds like
FSAHX Short duration high income fund 1.76 year duration, 2.3x longer than I was thinking.
SPHIX High income fund 3.5 years duration

So would very short durations be enough risk containment to get a riskophobe to nibble on junk bonds?
Assuming you do a little homework before buying a CCC, how short is short enough duration to reasonably expect see the straw that breaks the back of an already sick camel (another rating downgrade, etc)?
Are there other ways to contain high yield bond risk?

[COcheesehead]

I own a bunch of individuals bonds, but I don’t even attempt to walk the fine line with individual junk bonds. They are one of the few asset classes where I use a mutual fund. ARTFX is what I use and it’s only 4% of my bond holdings.

[audreyh1]

I avoid high yield risk by completely avoiding junk bonds.

[38Chevy454]

I agree, tough to get bond yields with any return without higher risk. My solution is to just use bond funds and not individual bonds, to spread the risk out. Plus i do not have the time or desire to want to do the detailed investigation for individual bonds. I'll pay the fees of the bond fund to offset some of the potential returns to let the people that have expertise on this area do it for me.

[brewer12345]

Simply put, junk does not offer enough compensation for the risk right now. We are late on the credit cycle, leverage levels are high, covenants are weak, and spreads are low. I made a living as a junk bond analyst for several years and I will tell you that the junk market is prone to excesses of optimism and pessimism. I am only ever interested in buying and owning this asset class when the excess is on the pessimistic side. For me that is generally index spreads of 800+BP. The index is about half that.