What Are High Yield Bonds?

What are High Yield Bonds?  High yield bonds are bonds issued by entities with a substandard credit rating of BB- or less.  These often-times called “junk bonds” offer high yield interest rates to consumers in exchange for them accepting lower security in being repaid their investment amount.  High yield bond investing has existed for many years, and peaked in 1998 with over $160 billion in bonds issued.  Since that time this number has dropped and risen as economic times fluctuate.  In a bull market many investors are willing to involve themselves directly or in funds engaged in high yield bond investing, the surging market typically signaling that the inherent risk in these bonds will be hedged by overall market gains.  In a bear market, or worse a recession, not only will there typically be a significant drop investors opting for high-yield bonds, but these same bonds can put individual investors and even larger institutions in financial peril.  As seen in 2009 with the failing of major mortgage lending leaders heavily vested in so called junk bonds, there does exist inherent danger in looking for high-interest returns in potentially shaky bonds.

High Yield Bond Investing

High yield bond investing however potentially risky is also enormously profitable when executed with precision and a little luck.  On average high yield junk rated bonds will pay out 4% or more in interest payments over the standard rates at any given time on AAA rated bonds, such as those issued by the US Treasury.  Most of the bonds an investor will find categorized as high yield bonds are issued by corporations looking for capital.  The risk in high-yield bonds is similar to that found in stock investment in corporations: should the company do well, the money will be fine and the interest amounts on the bonds paid.  Should the company fail, file for bankruptcy protection, or re-categorize issued bonds, the bonds can quickly become, well junk.

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