High Yield
Sub-investment-grade bonds rated BB+ and below. How the 'junk bond' market transformed leveraged buyouts and the entire corporate M&A ecosystem in the 1980s and beyond.
Junk Bonds — Myth and Reality
"Junk bond" is a nickname coined by critical journalists when Michael Milken pioneered the HY market at Drexel Burnham Lambert in the 1970s–80s. Yet today's global HY market is roughly $2–3 trillion in size — far from the "junk" image.
HY issuers fall into two main categories: (1) Fallen Angels — former IG issuers downgraded to HY. They still have substantial operations and brand recognition. (2) Original HY (Born HY) — growth-stage companies, post-LBO highly leveraged firms, and startups that scaled.
HY bonds offer spreads of 300–600bps+ vs. IG, providing much higher investor returns, but carrying significant default risk if the issuer stumbles. Historical annual default rates for HY are approximately 3–5%.
HY and LBO — Fuel for Leveraged Capitalism
The greatest strategic significance of the HY market in modern capital markets is its connection to LBOs (Leveraged Buyouts). An LBO uses the target company's assets or cash flows as collateral to raise large amounts of debt for acquisition. Much of this debt is raised as HY bonds or leveraged loans in the capital markets.
PE firms like KKR, Blackstone, and Apollo could not execute deals at their current scale without the HY market. HY spread levels and liquidity directly determine PE deal feasibility.
The sharp decline in PE deal activity during the 2022–2023 rate spike — when HY spreads widened significantly — illustrated this connection in real time.
Key Terms
Acquiring a company using large amounts of debt secured by target assets/cash flows. HY bonds are a primary funding tool.
The percentage of HY bonds that fail to meet payment obligations in a given period. Historically ~3–5% annually.
Where This Concept Appears
Learning Paths
Related Concepts
Investment Grade
BBB- (S&P) / Baa3 (Moody's) and above. Because most institutional investors are mandated to hold only IG bonds, the IG/HY divide carries implications far beyond a simple ratings boundary.
Spread & Basis
How much higher a bond's yield is versus the risk-free benchmark. This spread encapsulates the market's credit and liquidity assessment of the issuer.
The DCM Ecosystem Map
The global bond market is worth over $130 trillion — larger than equities. Yet many of the biggest buyers aren't here for yield. Understanding DCM starts with this paradox: a complete map of the issuer–investor–investment bank triangle.
Reach for Yield
The behavioral pattern where investors take on higher risk to meet yield targets in a low-rate environment. The backdrop behind Korea 1998's T+345bp spread — and the seed of many crises.