What is the highest grade of high yield bonds?
Investment grade and high yield bonds
A non-investment-grade bond is a bond that pays higher yields but also carries more risk and a lower credit rating than an investment-grade bond. Non-investment-grade bonds are also called high-yield bonds or junk bonds.
For Standard & Poor's, AAA is the best rating, followed by AA, A, BBB, BB, B, CCC, CC, and C. D is used for bonds that are already in default, which means the underlying company isn't able to pay back principal.
It is widely accepted that bonds classified as investment grade tend to be less risky than those designated as high yield and usually deliver a lower return. High yield bonds typically offer higher returns, but with more risk, because the issuers are considered to have a greater chance of default.
- ICE BofA BB US Corporate Index Effective Yield. 2024-04-25. 6.73% 6.64%
- ICE BofA B US Corporate Index Effective Yield. 2024-04-25. 7.90% 7.78%
- BofA CCC & Lower US High Yield Index Effective Yield. 2024-04-25. 13.68% 13.61%
- Vanguard Total World Bond ETF (BNDW)
- Vanguard Core-Plus Bond ETF (VPLS)
- DoubleLine Commercial Real Estate ETF (DCRE)
- Global X 1-3 Month T-Bill ETF (CLIP)
- SPDR Portfolio Corporate Bond ETF (SPBO)
- JPMorgan Ultra-Short Income ETF (JPST)
- iShares 7-10 Year Treasury Bond ETF (IEF)
- iShares 10-20 Year Treasury Bond ETF (TLH)
A high-yield corporate bond is a type of corporate bond that offers a higher rate of interest because of its higher risk of default. When companies with a greater estimated default risk issue bonds, they may be unable to obtain an investment-grade bond credit rating.
It is widely accepted that bonds classified as investment grade tend to be less risky than those designated as high yield and usually deliver a lower return. High yield bonds typically offer higher returns, but with more risk, because the issuers are considered to have a greater chance of default.
Investment-grade bonds: Investment-grade bonds are viewed as good to excellent credit risks with a low risk of default. Top companies may enjoy being investment-grade credit ratings and pay lower interest rates because of it.
Moody's assigns bond credit ratings of Aaa, Aa, A, Baa, Ba, B, Caa, Ca, C, as well as WR and NR for 'withdrawn' and 'not rated' respectively. Standard & Poor's and Fitch assign bond credit ratings of AAA, AA, A, BBB, BB, B, CCC, CC, C, D.
When should I buy high-yield bonds?
High-yield bonds tend to perform best when growth trends are favorable, investors are confident, defaults are low or falling, and yield spreads provide room for added appreciation.
- SPDR® Portfolio Corporate Bond ETF.
- iShares Broad USD Invm Grd Corp Bd ETF.
- SPDR® Portfolio Interm Term Corp Bd ETF.
- Goldman Sachs Acss Invmt Grd Corp Bd ETF.
- iShares 5-10 Year invmt Grd Corp Bd ETF.
- iShares ESG USD Corporate Bond ETF.
- iShares iBoxx $ Invmt Grade Corp Bd ETF.
Advisor Insight. High yield bonds are not intrinsically good or bad investments. Generally, a high yield bond is defined as a bond with a credit rating below investment grade; for example, below S&P's BBB. The bonds' higher yield is compensation for the greater risk associated with a lower credit rating.
Bonds rated below Baa3 by ratings agency Moody's or below BBB by Standard & Poor's and Fitch Ratings are considered “speculative grade” or high-yield bonds. Sometimes also called junk bonds, these bonds offer higher interest rates to attract investors and compensate for the higher level of risk.
Treasuries. Treasury securities like T-bills and T-notes are very low-risk as they're issued and backed by the U.S. government. They provide a safe way to earn a return, albeit generally lower than aggressive investments.
Both EE and I savings bonds earn interest monthly. Interest is compounded semiannually, meaning that every 6 months we apply the bond's interest rate to a new principal value. The new principal is the sum of the prior principal and the interest earned in the previous 6 months.
These are U.S. government bonds that offer a unique combination of safety and steady income. But while they are lauded for their security and reliability, potential drawbacks such as interest rate risk, low returns and inflation risk must be carefully considered.
For the near-term, T-bills are going to offer better yields than I Bonds. Short-term investors should favor T-bills if their investing horizon is 2 years or less.
So, the risks to investing in T-bonds are opportunity risks. That is, the investor might have gotten a better return elsewhere, and only time will tell. The dangers lie in three areas: inflation, interest rate risk, and opportunity costs.
High-yield corporate bonds
Investor takeaway: We're still cautious on high-yield bonds, but acknowledge that if a recession is avoided, high-yield bonds may still perform well despite low spreads. Over the short run, expect volatility and potential price declines as defaults continue to pile up.
What happens to high-yield bonds in recession?
The big deal with high-yield corporate bonds is that when a recession hits, the companies issuing these are the first to go. However, some companies that don't have an investment-grade rating on their bonds are recession-resistant because they boom at such times.
Positive Signals for Future Returns
At the beginning of 2024, bond yields, the rate of return they generate for investors, were near post-financial crisis highs1—and for fixed-income, yields have historically served as a good proxy for future returns.
Higher rate of return: Currently, the combined rate of I bonds is set at 5.27%, which is significantly higher than the average return you'd find with a traditional savings account, money market account , or certificate of deposit (CD).
High-yield bonds face higher default rates and more volatility than investment-grade bonds, and they have more interest rate risk than stocks. Emerging market debt and convertible bonds are the main alternatives to high-yield bonds in the high-risk debt category.
Series I Savings Bonds, or I bonds, are specifically designed to protect your money from the effects of inflation. Savings accounts are not -- they simply pay interest based on prevailing rates. And these rates can be very different.
