High-Yield Bond [HY]

High-yield bonds, also called junk bonds, are corporate bonds rated below investment grade (BB+ and lower by S&P, Ba1 and lower by Moody’s). They offer higher yields to compensate for increased default risk. For example, while an investment-grade bond might yield 5%, a high-yield bond could yield 8-12% or more. Companies issuing high-yield bonds include smaller firms, companies with high debt levels, or those in financial distress. The historical default rate averages 3-4% annually but can spike during recessions – reaching 13% in 2009. Despite risks, high-yield bonds have provided strong long-term returns, with diversified portfolios historically yielding 4-6% more than Treasuries. They’re less interest-rate sensitive than investment-grade bonds due to credit risk dominance. The high-yield market totals $1.5 trillion, providing crucial financing for companies unable to access investment-grade markets. Investors include specialized mutual funds, hedge funds, and institutional investors.