High Yield Bonds — CIO Academy

High Yield: Risk and Return

High Yield (HY) bonds are corporate debt of issuers with ratings of BB+ and below. They are also called "junk bonds" or "speculative grade". This is an intermediate class between IG (investment grade) bonds and equities in terms of risk profile.

Characteristics of the HY Market

Parameter	US High Yield	EUR High Yield
Market volume	~$1.5 trillion	~€400 billion
Main index	Bloomberg US HY	iBoxx EUR HY
Average rating	B+	BB-
Average spread	350-500 bp	300-450 bp
Average duration	4-5 years	3-4 years

Risk/Return Profile

Rating	Historical default (5 years)	Typical spread	Recovery rate
BB	2.5%	200-350 bp	50-60%
B	8-10%	350-500 bp	35-45%
CCC	25-35%	700-1500 bp	25-35%

Default Rate Cycles

Period	Default Rate	Comment
Economic expansion	1-2%	Low defaults
Onset of recession	4-6%	Increase in distressed companies
Deep recession (2008-09)	12-14%	Mass bankruptcies
COVID (2020)	6-7%	Rapid recovery thanks to the Fed

Sector Structure of HY

Sector	Weight	Characteristics
Energy	~15%	High volatility, commodity exposure
Healthcare	~10%	LBO-driven, pharma
Services	~12%	Heterogeneous sector
Technology	~8%	Growing segment
Retail	~8%	Structural issues (e-commerce)
Media/Telecom	~10%	Cable, wireless

When to Buy High Yield?

Spreads > 600-700 bp — historically wide, compensate for defaults
The Fed eases policy — support for risk assets
Economy exits recession — defaults fall, spreads narrow
Low defaults — cycle turning point

Risks of High Yield

Credit Risk — main risk, defaults can be significant
Liquidity Risk — in stress, bid-ask spreads widen to 5%+
Concentration Risk — several large issuers dominate
Rate Risk — lower than in IG (shorter duration), but present
Equity-like behavior — correlation with equities ~0.7

HY vs IG: Comparison

Characteristic	IG	HY
Spread to Treasuries	100-150 bp	350-500 bp
Default rate	0.1%	3-4%
Duration	7-8 years	4-5 years
Correlation with equities	0.3	0.7
Liquidity	Good	Average