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Concept
High-yield debt
Summary
In finance, a high-yield bond (non-investment-grade bond, speculative-grade bond, or junk bond) is a bond that is rated below investment grade by credit rating agencies. These bonds have a higher risk of default or other adverse credit events, but offer higher yields than investment-grade bonds in order to compensate for the increased risk.
As indicated by their lower credit ratings, high-yield debt entails more risk to the investor compared to investment grade bonds. Investors require a greater yield to compensate them for investing in the riskier securities.
In the case of high-yield bonds, the risk is largely that of default: the possibility that the issuer will be unable to make scheduled interest and principal payments in a timely manner. The default rate in the high-yield sector of the U.S. bond market has averaged about 5% over the long term. During the liquidity crisis of 1989-90, the default rate was in the 5.6% to 7% range. During the pandemic of 2020, default rates rose to just under 9%. A recession and accompanying weakening of business conditions tends to increase the possibility of default in the high-yield bond sector.
Institutional investors (such as pension funds, mutual funds, banks and insurance companies) are the largest purchasers of high-yield debt. Individual investors participate in the high-yield sector mainly through mutual funds.
Some institutional investors have by-laws that prohibit investing in bonds which have ratings below a particular level. As a result, the lower-rated securities may have a different institutional investor base than investment-grade bonds. .
U.S. high-yield bonds outstanding as of the first quarter of 2021 are estimated to be about 10.7 trillion. New issuances amounted to $435 billion in 2020.
Indices for the high-yield market include:
ICE Bank of America US High Yield Total Return Index,
Bloomberg Barclays US Corporate High Yield Total Return Index,
S&P U.S.
Official source
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