High Yield

High yield refers to bonds issued by companies, or occasionally governments, whose creditworthiness has been rated below the threshold that major rating agencies define as "investment grade." The colloquial term is "junk bonds," a blunt label that stuck from an earlier era of the market. Because these borrowers carry a higher probability of missing payments or defaulting entirely, they must offer meaningfully higher interest rates to attract lenders. That premium above safer bonds is called the credit spread.

For families with substantial wealth, high-yield bonds sometimes appear within a fixed income allocation as a way to pursue higher income, though the trade-off is meaningfully higher volatility and credit risk than investment-grade alternatives. Prices can fall sharply during economic downturns when default rates rise.

A common confusion is treating high yield as a monolith. In practice, ratings span a wide range below investment grade. A bond rated just below the cutoff is very different from one rated near the bottom of the scale. A hypothetical family evaluating a high-yield allocation should ask their advisor how default risk, liquidity, and correlation to equities are being managed within the broader asset allocation. A qualified advisor must evaluate suitability for any particular situation.