Economy & context
High-yield bonds are corporate debt rated below investment grade or carrying comparable credit risk. Higher promised yield compensates for greater default, recovery and liquidity uncertainty.
Make it click
A stretched borrower offers more interest to attract a lender. The extra payment is valuable only if defaults and recoveries do not consume it.
Now put that into markets
High-yield markets combine rate sensitivity with strong exposure to economic and company conditions. Spreads often widen during stress.
Returns come from coupon, price, defaults and recovery. Callable structures can limit upside when credit improves.
Examine spread, maturity, covenants, seniority, sector and expected loss. Use diversified indices carefully because composition changes.
Headline yield is not expected return and can be inflated by distressed prices. Correlation with equities can rise in downturns.
Takeaway
