Glossary
High-yield bond
A bond rated below investment grade (below BBB- or Baa3), paying higher interest to compensate for greater default risk.
On this page
A high-yield bond is a debt security rated below investment grade: BB+ or lower by S&P Global and Fitch, or Ba1 or lower by Moody's. Because the issuer is judged more likely to default, it must offer a higher interest rate to attract lenders. The same securities are often called junk bonds. High yield is a large, established market used by many well-known companies, and its behavior sits somewhere between investment-grade bonds and stocks.
How it works
Investors judge high-yield bonds mainly by their credit spread, the extra yield over a Treasury of similar maturity. The spread pays for expected losses from defaults and for the extra risk and illiquidity.
What drives them
- The economy. Default rates rise in recessions, so high-yield prices often fall alongside stocks.
- Interest rates matter less than for high-grade bonds, because the larger coupon shortens effective duration.
- Ratings migration. "Fallen angels," bonds cut from investment grade, can face forced selling by funds that may hold only investment-grade debt.
- Covenants and seniority affect how much bondholders recover in a default.
Diversification across many issuers, through funds or ETFs, is common because single-issuer losses can be large.