Junk bond
Fixed IncomeDefinition
A bond from a company with a weaker credit rating (BB or lower by S&P, Ba or lower by Moody's), meaning there is a real chance the company might not pay you back. To compensate for that risk, junk bonds pay higher interest than safer corporate bonds or Treasuries. Also called 'high-yield' bonds.
In calm markets junk bonds behave like bonds. In scary markets they behave more like stocks, falling 20-40% in recessions. Over very long periods they have beaten Treasuries, but investors pay for that premium with much more stomach-turning volatility.
In calm markets junk bonds behave like bonds. In scary markets they behave more like stocks, falling 20-40% in recessions. Over very long periods they have beaten Treasuries, but investors pay for that premium with much more stomach-turning volatility.
Example
In early 2024, the main junk bond index yielded about 8% while the 10-year Treasury yielded about 4.2%. The extra 3.8 percentage points is what the market demanded as payment for the higher default risk.
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