High-Yield Bond
IntermediateA high-yield bond is a bond with a credit rating below investment grade, issued by a company or government considered to have a higher risk of default, which pays a higher interest rate to compensate investors.
Credit rating agencies grade bonds by credit risk. Bonds rated below BBB- by S&P and Fitch, or below Baa3 by Moody’s, are classed as high yield, also called speculative grade or, informally, junk bonds.
High-yield issuers include companies with high debt, young or fast-growing businesses, companies owned by private equity firms and companies whose credit has deteriorated, known as fallen angels.
For example, a highly indebted company might issue bonds paying 8% when similar investment-grade bonds pay 5%. The extra 3 percentage points compensates investors for the greater chance that the company will not repay.
High-yield bonds can offer attractive income, but they carry significant credit risk, especially during recessions, when defaults rise. Their prices often move more like shares than like safe government bonds. Investors typically hold them through diversified funds to spread the risk of individual defaults. The market grew rapidly from the 1980s and is now a major source of financing for companies worldwide.
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