Rob Carrick wrote a pretty good article on how High Yield bonds are actually a very good diversifier within a Fixed Income portfolio. Actually, we think they are a very good diversfier within an overall portfolio, not just Fixed Income. Why?
Because if you regress monthly returns of various asset classes over a period of say 5yrs, you find that high yield has a pretty low correlation of returns to different asset classes:
This data is a bit stale and covers monthly total returns on all asset classes/Indices from Feb/09 thru Feb/14 but it wouldn't change much if I had time to update it.
Note that C$ HY has a very low correlation to pretty much all of the asset classes listed here and what that does is, as Rob correctly points out, is provides diversification to your portfolio, but the entire portfolio, not just Fixed Income...simply because it has low correlation to Equity Indices too.
Note that C$ HY has effectively negative low correlation to interest rates as represented by the C$ 5yr Govt of Cda bond. Why? Well HY is credit risk, NOT interest rate risk...very important differentiating factor.
And also note that C$ Investment Grade (IG) has a pretty high correlation to interest rates at 64% (highlighted). What does that tell you? When you buy IG bonds, you are really buying about 65% interest rate risk.
Decent article but it could be taken a lot further on the diversification story as the numbers don't