High-yield bond

A high-yield bond is one rated below BBB− by S&P Global and Fitch, or below Baa3 by Moody's. Issuers are typically companies with high debt, uneven profits or short track records, and sometimes formerly strong companies that have been downgraded, known as fallen angels. Because lenders face a greater chance of not being paid, these issuers must offer higher coupons and yields than investment-grade borrowers. The difference between a high-yield bond's yield and that of a government bond of similar maturity is called the credit spread.

High-yield bonds behave partly like bonds and partly like shares. Their prices depend on interest rates, but also heavily on the economy and on company profits, so they tend to fall at the same time as stock markets, especially in recessions, when defaults rise and spreads widen. The headline yield overstates the likely return, because some issuers will default and investors usually recover only part of their money. Spreading money across many issuers, typically through a fund, reduces the damage from any single default but does not remove the risk of broad losses.