Understanding High-Yield Bonds and the Origin of the 'Junk' Market

Rating agencies such as S&P and Moody’s assess a company’s ability to repay debt, assigning ratings from AAA to D. Bonds rated BBB– or higher are classified as investment grade, while those below this threshold are categorized as high yield, or junk. The term 'junk' originated in the 1980s when Michael Milken created a market for bonds that major banks were unwilling to finance.

High-yield bonds have historically generated a large share of stock market returns while exhibiting lower volatility. These bonds represent a loan to a company, and bondholders are prioritized over shareholders in the event of a company failure.