Junk Bond/Treasury convergence
Typically junk bonds, given their speculative grade, are undervalued as people avoid them. Therefore the spread over treasuries is more than the risk of default, by buying junk bonds and selling treasuries, to hedge interest rate risk. Often profits can be achieved by buying junk bonds and selling treasuries, unless the junk bond defaults.
Wikipedia doesn't detail this interest rate hedge. Assume that a junk bond never defaults and the semistrong-form of the EMH:
Zvi Bodie, Alex Kane, Alan J. Marcus. Investments (2018 11 edn). p 338.
The semistrong-form hypothesis states that all publicly available information regarding the prospects of a firm must be reflected already in the stock price. Such information includes, in addition to past prices, fundamental data on the firm’s product line, quality of management, balance sheet composition, patents held, earnings forecasts, and accounting practices. Again, if investors have access to such information from publicly available sources, one would expect it to be reflected in stock prices.
Correct me if I'm wrong, but Treasury bonds' interest usually $<$ junk bonds' interest. So
why would anyone rational sell you junk bonds and buy T-bonds from you (so that you can long junk bonds and short T-bonds)?
wouldn't this spread over treasuries always be forthwith arbitraged?