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A bond rated below investment grade (below BBB-/Baa3) that offers higher interest rates to compensate for greater default risk.
High-yield bonds, also called "junk bonds," are issued by companies with weaker credit profiles, including highly leveraged firms, startups, or those in financial distress. They typically yield 3-6 percentage points more than comparable Treasury bonds. The high-yield market was popularized in the 1980s by Michael Milken. While individual high-yield bonds carry significant default risk, a diversified portfolio of high-yield bonds has historically delivered returns between those of investment-grade bonds and stocks. During economic downturns, high-yield spreads widen dramatically as default fears increase.