Junk Bond (High-Yield Bond)

A junk bond is a corporate bond rated below investment grade (BB+ or lower at S&P, Ba1 or lower at Moody's), issued by a company with a higher perceived risk of default. To compensate for that risk, junk bonds pay meaningfully higher yields than investment-grade debt from more stable issuers.

The category performs differently from other bonds in a downturn: because default risk rises when the economy weakens, junk bonds tend to trade more like stocks than like safe government debt during a recession scare, which is a common surprise for investors who assume all bonds move together.