High-yield bonds (the polite term for “junk bonds” or bonds issued by less credit-worthy companies) have declined in price lately. For example, the price of the iShares iBoxx $ High Yield Corporate Bond ETFHYG, -0.67% has dropped to under $84 a share from around $95 in June 2014. Since bond prices and yields move like a see-saw in relation to each other, the yield of high yield bonds has increased correspondingly. The yield of the main junk bond index, the Bank of America Merrill Lynch High Yield Master II, is around 7.6% now, up from a low of less than 6% in early 2014. St. Louis Fed So, with prices lower and yields higher, is now the time to buy some yield on the cheap? It might be, but nobody should jump in before considering the arguments of a research paper from Boston-based asset management firm, Grantham, Mayo, van Oterloo (GMO). Author of the GMO paper, Ara Lovitt, notes that maturities are a few years away, generally giving investors confidence despite the recent selloff. But this confidence may be unwarranted. According to a certain commonsense theory, when their high-yielding debt matures, some companies won’t be able to raise capital, and that would trigger bankruptcies and rout the market. Right now, however, maturities are a few years away for most companies, making high yield look enticing, especially combined with the recent price drop. But Lovitt’s study shows that investors shouldn’t necessarily feel safe with a maturity wall few years away. That’s because, strangely enough, problems in the high-yield market often arrive well before companies have to refinance their debt. Lovitt examined the last three credit busts and found that defaults occurred before significant parts of the market reached maturity. Maturities simply weren’t a good indication of when defaults would arrive, Lovitt’s study found. UBS’s Axel Weber on market correction (1:38) The correction in emerging markets should be ‘pretty orderly,’ says Axel Weber, Chairman of the Board of UBS Group, during an interview with WSJ EMEA editor Thorold Barker. Moreover, Lovitt’s analysis found that maturities were high at market bottoms, not before. Overall, to the extent that there was a maturity “signal,” it told investors to be vigilant when they otherwise might have been complacent (before maturities hit) and to be aggressive when they otherwise might have been cautious (precisely when maturities hit). While this seems counterintuitive, it makes some sense. Deep into a boom, credit standards are loose, and below investment-grade companies can refinance their debt and extend their maturities. But that means they, in effect, often refinance just as the economy is about to get weak, and their cash flows are about to deteriorate. And while extension can help in individual cases, it doesn’t necessarily help strapped companies en masse. As Lovitt puts it: Whether due to a recession, tightening credit conditions, or something else, eventually corporate cash flows are pressured, and debt is downgraded and defaults. Conversely, credit busts eventually stabilize after a painful sell-off. During the sell-off, many companies lose access to the capital markets, and fewer refinancing deals are done. At the tail-end of the market sell-off, because there have been fewer refinancing deals, one would expect relatively more near-term maturities than at the market peak. Energy proves the point A recent spate of high-yield bankruptcies among energy companies proves the point that the maturity wall isn’t always significant. Energy companies have gone bankrupt not because of hitting a maturity wall, but because of market conditions specific to energy, namely the low price of oil. Lovitt even cites one energy company that filed for bankruptcy immediately after issuing new debt and without making its first interest payment. Many reasonable allocation plans call for some exposure to high-yield bonds at all times. Investors, however, should probably keep those at a minimum now, despite the recent price drop and yield boost. There has been dramatic issuance of junk bonds in recent years, and they’ve been issued with increasingly weaker protections for lenders. At the least, depending on the maturity wall to guide your exit and entry probably isn’t wise. More from MarketWatch