What Are High-Yield Bonds (Junk Bonds)
Have you ever been tempted by 'a bond paying 8% or 10% a year'? Let's take a sober look at what risk hides behind that high interest.
What is a high-yield bond (junk bond)
A high-yield bond is a bond whose credit rating falls short of investment grade. It's also called a junk bond, meaning 'trash.'
Specifically, bonds rated Ba1 or lower by Moody's, or BB+ or lower by S&P and Fitch, fall into this category. Everything just below BBB- (Baa3), the bottom of investment grade, is the high-yield territory.
Because the issuing company's default risk is relatively high, these bonds have to pay more interest (yield) to attract investors. The very name 'high yield' carries the meaning 'that much riskier.'
The true face of high interest: default rates
High interest isn't free. The lower the rating, the sharply higher the actual probability of not being paid back (the default rate).
Looking at Moody's long-term data (1970-2006), the 10-year cumulative default rate was about 4.6% for Baa, the bottom of investment grade, while for Ba, the speculative grade just below it, it was about 19%, and for B about 43%. Each step down sharply increases default risk.
In other words, the extra interest a high-yield bond pays is 'given as compensation because there's this much risk of not being paid back.' If you see only the interest and think 'high return,' you miss the possibility of loss behind it.
Default rates vary by the compiling institution and period. The figures above are on Moody's 1970-2006 issuer-weighted 10-year cumulative basis and differ by period.
Its true colors revealed in a crisis: spread surges
High-yield risk is hard to see in normal times but explodes during a crisis. The metric that shows this is the 'high-yield spread,' which indicates how much higher high-yield bond yields are than safe government bonds.
In normal times this spread is around 3-5 percentage points, but when a crisis hits, investors rush to dump risky bonds, prices crash, and the spread spikes.
During the 2008 financial crisis, the U.S. high-yield spread surged to about 20 percentage points (up to around 22% depending on the tally). During the 2020 COVID shock too, it spiked to about 11 percentage points before coming back down within a few months after the central bank's massive intervention.
A spike in the spread means that at that moment high-yield bond prices crashed and holders took large losses.
Spread figures are on the ICE BofA US High Yield OAS basis and differ by decimal depending on the source (FRED, etc.). The 2008 peak is tallied at about 19.9-21.8 percentage points. (Source: FRED BAMLH0A0HYM2, CFA Institute)
常见问题
Q. Since high-yield bonds pay high interest, isn't parking money in them long-term a good deal?
The interest is indeed high, but that interest is compensation for the risk of loss from default. An individual high-yield bond can lose a large part of its principal if the issuing company defaults, and prices plunge during a crisis. Even a high-yield fund diversified across many issues can suffer a large drawdown in a down market. Understand it not as 'high interest = safe high return' but as 'high interest = high risk.'
Q. Are high-yield bonds as risky as stocks?
They're different in character. Because high-yield is a bond, in normal times it pays interest and is calmer than stocks, but during an economic crisis it tends to fall sharply alongside stocks. When safe government bonds actually rise in a crisis, high-yield has tended to plunge like stocks. So some see them not as 'safe bonds' but as 'bonds with risk closer to stocks.'
📋 结果基于历史数据计算,过去的收益不代表未来的收益。
📋 本服务旨在帮助理解投资、供教育之用,并非投资建议。