Bonds & rates
High-yield bond
Also called Junk bond or Speculative grade
Debt rated below investment grade, paying more because default risk is materially higher.
How it works
High yield sits between bonds and equities in behaviour. It is far more correlated with the stock market than government debt is, because both depend on corporate health.
Diversification is essential: individual defaults are expected, and the return comes from the spread exceeding realised losses across a portfolio.
Where it misleads people
High yield is often bought as the income part of a portfolio and behaves like the equity part in a crisis. It falls when shares fall, which is exactly when the bond allocation is supposed to help.
Related terms
- Credit ratingAn agency’s assessment of how likely a borrower is to repay, on a lettered scale.
- Credit spreadThe extra yield a corporate bond pays over a government bond of the same maturity.
- DefaultA borrower failing to make a payment, or breaching a term of the debt agreement.
- Recovery rateHow much of a defaulted bond’s face value holders eventually get back.
- CorrelationA measure from −1 to +1 of how closely two investments move together.
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Educational reference only. Nothing here is investment advice or a recommendation to buy or sell anything, and tax treatment depends on your own circumstances and the country you are in.