High-Yield Bond
A bond rated below investment grade that offers higher interest rates to compensate investors for elevated default risk.
What is High-Yield Bond?
A high-yield bond, commonly called a junk bond, is a debt security issued by a company rated below investment grade—below BBB− by S&P and Fitch, or below Baa3 by Moody's—that compensates investors for the elevated default risk with a higher coupon rate than investment-grade bonds. High-yield bonds play an important role in capital markets by providing financing to companies that cannot access investment-grade debt markets, while offering income-seeking investors significantly higher yields than government or investment-grade corporate bonds. Their prices are more sensitive to changes in credit conditions and economic cycles than to interest rate movements, making credit analysis central to high-yield investing.
Example
In early 2022, the ICE BofA U.S. High Yield Index yielded approximately 5.2%, while 10-year U.S. Treasury bonds yielded around 1.8%, a credit spread of roughly 3.4 percentage points. That spread represents the additional yield investors demanded to accept the higher default risk of below-investment-grade issuers.
Source: FRED — ICE BofA US High Yield Index Option-Adjusted Spread