High-Yield Bond

Below-investment-grade corporate debt offering higher yields to compensate for risk.

A high-yield bond is a debt security issued by a corporation or government that has a lower credit rating than "investment-grade" debt. Because these issuers are judged by credit rating agencies to have a higher risk of defaulting on their payments, they must offer a higher interest rate (or yield) to attract investors. These bonds are typically rated BB+ or lower by S&P and Fitch, or Ba1 or lower by Moody's. Investors analyze high-yield bonds by looking at the credit spread, which is the difference in yield between the high-yield bond and a risk-free government benchmark of similar maturity. When the economy is strong, these spreads tend to narrow because default risks decrease. Conversely, during economic downturns, spreads widen as investors demand even higher premiums to hold risky debt. For retail investors, high-yield bonds offer the potential for equity-like returns and regular income, but they come with significant risks. Beyond the risk of default, these bonds are highly sensitive to economic cycles and are often less liquid than investment-grade bonds, meaning they can be difficult to sell quickly during a market panic without taking a steep loss.

Company XYZ wants to issue a 10-year bond but has a BB credit rating due to high debt levels. To attract investors, it must price its bond to yield 7.5%. At the same time, a 10-year US Treasury bond (considered risk-free) yields 3.5%. The credit spread for Company XYZ's high-yield bond is 7.5% - 3.5% = 4.0% (or 400 basis points).