High-Yield Bonds
High-yield or 'junk' bonds are corporate bonds rated below investment grade (BB+ or lower by S&P, Ba1 or lower by Moody's), offering higher yields to compensate for default risk.
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Definition
High-yield or 'junk' bonds are corporate bonds rated below investment grade (BB+ or lower by S&P, Ba1 or lower by Moody's), offering higher yields to compensate for default risk.
Use case
Used in fixed income workflows, analysis, and technical interviews.
Judgment check
Useful only when the assumptions and inputs behind the metric are understood.
Deep dive
How to think about High-Yield Bonds
Issuers include leveraged companies, those in distress, or PE-backed LBOs. Default rates historically average 3-5% annually with recovery rates of 40-60 cents on the dollar. High-yield bonds are correlated with equities during market stress but provide income. They're an important diversifier in multi-asset portfolios.
Example: During the 2008 crisis, high-yield spreads exploded from 600 bps to over 2000 bps. A bond fund holding diversified high-yield might yield 8% but suffered double-digit price declines as default fears spiked before recovering.