Loading the player...

What is a 'High-Yield Bond'

A high-yield bond is a high paying bond with a lower credit rating than investment-grade corporate bonds, Treasury bonds and municipal bonds. Because of the higher risk of default, these bonds pay a higher yield than investment grade bonds. Issuers of high-yield debt tend to be startup companies or capital-intensive firms with high debt ratios.

BREAKING DOWN 'High-Yield Bond'

Also known as "junk bonds".

Based on the two main credit rating agencies, high-yield bonds carry a rating below "BBB" from S&P, and below "Baa" from Moody's. Bonds with ratings at or above these levels are considered investment grade. Credit ratings can be as low as "D" (currently in default), and most bonds with "C" ratings or lower carry a high risk of default; to compensate for this risk, yields will typically be very high.

All "junk" connotations aside, high-yield bonds are widely held by investors worldwide, although most participate through the use of mutual funds or exchange-traded funds. The yield spread between investment grade and high-yield will fluctuate over time, depending on the state of the economy, as well as company and sector-specific events.

Generally, investors in high-yield bonds can expect at least 150 to 300 basis points greater yield compared to investment-grade bonds at any given time. Mutual funds provide a good way to gain exposure without the undue risk of investing in just one issuer's junk bonds.

High-Yield Bond Market Performance

Recently, central banks around the world, such as the Federal Reserve, European Central Bank (ECB) and Bank of Japan, have taken measures to inject liquidity into their economies and keep credit readily available, thereby lowering the costs of borrowing and eating into the returns of lenders. As of February 2016, $9 trillion worth of sovereign bonds, or government debt, offered a yield between 0 and 1% and $7 trillion offered a negative yield, after accounting for expected inflation.

This would normally cause investors to look towards other markets to generate a higher rate of return, but high-yield bond markets have been volatile. Although the value of high-yield mutual funds rose from $100 billion in 2009 to $400 billion in 2014, the total value of the high-yield bond market fell from $1.41 trillion in April 2015 to $1.23 trillion in December 2015. This change is mostly the result of falling commodity prices, especially oil, that have hit the energy sector hard; energy bonds represent 14% of the high-yield market but 36% of the distressed high-yield market, as of 2015. Distressed debt is debt that offers a yield of at least 1,000 basis points over a Treasury bond with the same maturity. The selling off of high-yield debt led junk bond prices to fall by almost 5% in 2015; junk bond prices in the energy industry fell by 20%.

RELATED TERMS
  1. High-Yield Bond Spread

    The percentage difference in current yields of various classes ...
  2. Bond Rating

    A grade given to bonds that indicates their credit quality. Private ...
  3. Credit Market

    1. The broad market for companies looking to raise funds through ...
  4. Dollar Price

    The percentage of par, or face value, at which a bond is quoted. ...
  5. Discount Bond

    A bond that is issued for less than its par (or face) value, ...
  6. Bond Market

    The environment in which the issuance and trading of debt securities ...
Related Articles
  1. Investing

    High-Yield Corporate Bonds: Issuers and Investors

    High-yield bonds play a significant role in various investment portfolios. An examination of the issuers' and investors' side is vital.
  2. Investing

    The Pros and Cons of High-Yield Bonds

    Junk bonds are more volatile than investment-grade bonds but may provide significant advantages when analyzed in-depth.
  3. Investing

    What's a High-Yield Bond?

    A high-yield bond is a bond issued by a company with a very low credit rating.
  4. Investing

    High-Yield Bond ETFs: 3 Reasons to Avoid Them

    Examine high-yield bond performance in 2016. Why do rising default rates, falling recovery rates and Fed rate hikes make these securities worth avoiding?
  5. Investing

    Are Rallying Junk Bonds Good News for Stocks?

    The recent performance of junk bonds could indicate that the markets may continue to rise for the time being.
  6. Investing

    4 High Yielding Junk Bond ETFs

    High-yield bonds have more default risk than investment-grade bonds, and that's why using an ETF might be the responsible way to invest.
  7. Investing

    Junk Bonds: Does High Yield Equal Extreme Risk?

    High-yield bonds present a lot of risks but do they outweigh the rewards? Here are some ETFs to consider, with caution.
  8. Financial Advisor

    A Brief History of the U.S. High Yield Bond Market

    The U.S. high-yield corporate bond market has existed for decades: it's known for its rapid growth periods as well as its risks.
  9. Investing

    How Rising Interest Rates Affect Junk Bonds

    We examine the impact of rising interest rates on higher-yielding bonds.
  10. Financial Advisor

    Top 3 High Yield Bond Mutual Funds (BHYIX, MWHYX)

    Read about three high-yield bond mutual funds and why they are currently popular, and learn the advantages and disadvantages of investing in high-yield bonds.
RELATED FAQS
  1. What are some examples of high yield bonds?

    Understand the nature of high-yield bonds and discover some examples of companies that become issuers of high-yield debt ... Read Answer >>
  2. How are junk bonds rated differently by Standard & Poor's and Moody's?

    Learn how credit rating agencies rate bonds with junk bond status, and understand how downgrade risk can impact the price ... Read Answer >>
  3. Can Mutual Funds Only Hold Bonds?

    Find out which mutual funds include only bonds in their portfolios. Learn why some funds invest in different types of bonds ... Read Answer >>
Hot Definitions
  1. Trumpcare

    The American Health Care Act, also known as Trumpcare and Ryancare, is the Republican proposal to replace Obamacare.
  2. Free Carrier - FCA

    A trade term requiring the seller to deliver goods to a named airport, terminal, or other place where the carrier operates. ...
  3. Portable Alpha

    A strategy in which portfolio managers separate alpha from beta by investing in securities that differ from the market index ...
  4. Run Rate

    1. How the financial performance of a company would look if you were to extrapolate current results out over a certain period ...
  5. Hard Fork

    A hard fork (or sometimes hardfork) is a radical change to the protocol that makes previously invalid blocks/transactions ...
  6. Interest Rate Risk

    The risk that an investment's value will change due to a change in the absolute level of interest rates, in the spread between ...
Trading Center