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High-yield 'junk' bonds
Boom from late 1970s· Asset or instrument
Fact, law or dataA rule, statute, definition or measured number.
Junk, or high-yield, bonds are corporate bonds rated below investment grade, paying higher interest because default is likelier.
See it on the Money & Finance map →How it works
They are rated BB+ or lower by S&P and Fitch, Ba1 or lower by Moody's. Some are 'fallen angels' cut from investment grade; others are issued as junk. From the late 1970s Michael Milken at Drexel Burnham Lambert built a market for new junk issues, funding upstarts and 1980s leveraged buyouts such as RJR Nabisco. Drexel collapsed in 1990 and Milken pleaded guilty to securities crimes. The US market is about $1.4 trillion; spreads over Treasuries reached about 20 points in late 2008.
Why it matters
Junk bonds opened public borrowing to riskier companies and fueled the buyout industry. Their spreads are a fast gauge of market fear.
Think of it like
Like a high-leverage mezzanine loan: a fatter coupon, because both the odds of default and the losses when it happens are larger.
Facts, rules and data
Moody's default studies since 1920 show junk issuers default about 4% a year on average, versus about 0.1% for investment grade. Spread data (ICE BofA indexes) are on FRED. Investors get exposure via high-yield bond funds.
Debates and risks
Whether fast-growing private credit has drawn the riskiest borrowers away from the public junk market, hiding where default risk now sits.
Connections (4)
▸High-yield 'junk' bonds are rated below investment grade by Credit rating agencies: Moody's, S&P and FitchFact, law or data
The connection
The line between BBB- and BB+ (Baa3 and Ba1 at Moody's) splits investment grade from junk. Crossing it matters: many institutions must sell a 'fallen angel' when it is cut, raising its borrowing costs. Ford, for example, was cut to junk in 2005 and again in 2019–20.
When and why
The investment-grade line entered US bank rules in 1936; Michael Milken's new-issue junk market grew from the late 1970s.
How we know
Agency default studies since 1920: junk-rated issuers default about 4% a year on average, investment grade about 0.1%.
Debates and risks
About half of investment-grade bonds now sit at the lowest BBB tier; whether a recession would push a wave of them into junk is debated.
▸High-yield 'junk' bonds financed 1980s buyouts in Private equity and leveraged buyoutsFact, law or data
The connection
Bank loans alone could not fund the largest 1980s buyouts. Michael Milken's team at Drexel Burnham Lambert sold high-yield bonds to cover the riskiest layer of debt, and its 'highly confident' letters let buyers bid before money was raised. That financed mega-deals like KKR's $25 billion RJR Nabisco takeover. Today leveraged loans and private credit share that role.
When and why
Drexel Burnham Lambert's Beverly Hills office, late 1970s–1989; Milken pleaded guilty to securities violations in 1990, the year Drexel went bankrupt.
How we know
Deal prospectuses, SEC and court records from Milken's case, and histories such as Barbarians at the Gate (1989) document the financing.
Debates and risks
Whether the 1980s buyout wave made companies more efficient or mainly shifted wealth from workers and bondholders to shareholders is still debated.
▸Syndicated and leveraged loans, and the CLOs that buy them are the floating-rate cousins of High-yield 'junk' bondsFact, law or data
The connection
Both lend to below-investment-grade companies, often the same ones. Leveraged loans usually float over SOFR, rank first in line with collateral, and can be repaid early at little cost. Junk bonds usually pay a fixed coupon, are often unsecured, and carry call protection. Many buyouts use both: loans on top, bonds beneath.
When and why
Side by side in US markets since the 1980s; each was roughly $1.4–1.6 trillion outstanding in 2025.
How we know
Moody's and S&P recovery studies show first-lien loans historically recovered about two-thirds of value in default, unsecured bonds well under half.
Debates and risks
Whether loan recoveries stay higher now that most loans lack maintenance covenants and many companies borrow only through loans.
▸Emerging-market debt: dollar bonds, local bonds and Brady bonds often carries ratings like High-yield 'junk' bondsFact, law or data
The connection
Many emerging-market governments are rated below investment grade (BB+ or lower), so their bonds trade alongside US junk bonds and pay similar spreads. Roughly half of JPMorgan's main EM dollar-bond index is high yield, including Turkey, Egypt and Nigeria, while Mexico and Indonesia are investment grade.
When and why
Global bond markets, using ratings from S&P, Moody's and Fitch.
How we know
JPMorgan EMBI index composition and rating-agency histories.
Debates and risks
Whether ratings judge emerging countries fairly; some argue the agencies are slow and biased.