What it is
Also known as high-yield bonds, junk bonds are debt instruments issued by companies that credit rating agencies like Moody's or S&P Global Ratings deem to have a higher risk of default. These bonds are rated below BBB- or Baa3. Because of this elevated risk, junk bonds offer significantly higher interest rates, or yields, compared to investment-grade bonds, to compensate investors for taking on additional credit risk.
Companies typically issue junk bonds when they cannot secure financing at lower rates due to their financial health or business model. While offering attractive yields, these bonds are highly sensitive to economic downturns and company-specific financial performance. In a recession, default rates on junk bonds tend to rise sharply, leading to significant losses for investors. Their prices are also sensitive to changes in credit spreads, which reflect the market's perception of risk.
Why it matters
Junk bonds offer higher potential returns but come with a much greater risk of default, making them volatile and sensitive to economic changes.
Reviewed under editorial standardsUpdated September 26, 2026Not investment advice