High-yield bonds are debt securities issued by borrowers whose credit ratings are below investment grade. They typically offer coupon rates higher than those on investment-grade bonds to reflect higher credit risk and greater likelihood of default.
Investors may use high-yield exposure to pursue higher income and potentially higher total return. They can be accessed directly through individual bonds, or more commonly through mutual funds or exchange-traded funds (ETFs) that specialize in high-yield. The risk profile means duration and price sensitivity can vary; high-yield bonds tend to be more responsive to changes in credit quality and overall economic conditions. Credit spreads over equivalent Treasuries can widen during market stress, causing price declines even when short-term interest rates move lower.
Main risks include default risk, credit rating changes, and liquidity risk. Performance is cyclical: in strong economies, defaults fall and spreads compress, supporting prices; in downturns, defaults rise and spreads widen, pressuring prices. Fees and fund structure matter, and diversification and risk controls (such as position limits and duration management) are important parts of managing exposure.
In a portfolio context, a manager adds exposure to high-yield bonds via a broad high-yield ETF to diversify income sources. The approach emphasizes income while also monitoring the risk of rising defaults during economic downturns.
Investment-grade bonds · Credit rating · Credit spread · Junk bonds · Default risk · Bond yield · Interest rate risk