High yield bonds

September 2024

High yield bonds have become a mainstay of many institutional investors’ portfolios in recent decades, be it on either a standalone basis or part of a broader credit allocation.

This paper introduces high yield bonds as an asset class. We begin by providing background information on high yield bonds. We then proceed to discuss the three major risks inherent in high yield bonds: liquidity risk, default risk, and interest rate risk. We subsequently analyze the return behavior of high yield bonds, including the characteristics of expected return, volatility, and correlation with other asset classes. We then proceed to evaluate the case for high yield bonds by comparing their use in a strategic and tactical context. The last section deals with issues an investor may face after deciding to invest in high yield bonds.