When the next corporate default wave comes, it could hurt investors more than they expect.

Losses on bonds from defaulted companies are likely to be higher than in previous cycles, because U.S. issuers have more debt relative to their assets, according to Bank of America Corp. strategists. Those high levels of borrowings mean that if a company liquidates, the proceeds have to cover more liabilities. 

"We’ve had more corporate debt than ever, and more leverage than ever, which increases the potential for greater pain," said Edwin Tai, a senior portfolio manager for distressed investments at Newfleet Asset Management.

Loss rates have already been rising. The potential for them to climb further may mean that in general junk bonds are not compensating investors enough for the risk they are taking, said Michael Contopoulos, high yield credit strategist at Bank of America Merrill Lynch. The average yield on a U.S. junk bond is now around 8.45 percent, according to Bank of America Merrill Lynch indexes, about the mean of the last 10 years.

In bad times, corporate bond investors on average lose about 70 cents on the dollar when a borrower goes bust. In this cycle, that figure could be closer to the mid-80s, Bank of America strategists said. 

David Fuller's view

Investors in risky corporate debt were given a slight reprieve when Janet Yellen postponed a potential rate hike for this month but should assume that there is likely to be at least one more quarter-point hike in the Federal Funds Rate this year.  

Which stock market will sectors are likely to be vulnerable?

Obvious candidates are the mostly smaller oil shares, including the shale sector, and mining companies.  This problem is clearly global, not just restricted to the USA.  Tech is a brilliant growth sector but the downside is rapid obsolescence.  Moreover, while many tech companies are floated, only the strong survive.  Additionally, highly competitive sectors subject to fashion change, including fast food restaurants and clothing retailers, are subject to rapid change.  According to Eoin and Mrs Treacy’s first-hand observations, California commercial property is commencing a downturn. 

Most bond investors have done exceptionally well for many years but they may wish to consider reducing risks in this sector.