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High Yield Bonds

High yield (non-investment grade) bonds are from issuers that are considered to be at greater risk of not paying interest and/or returning principal at maturity. As a result, the issuer will offer a higher yield than a similar bond of a higher credit rating and, typically, a higher coupon rate to entice investors to take on the added risk.

Reasons to consider high yield bonds

  • Higher yields
  • Capital appreciation potential

Find high yield bonds

What makes high yield corporate bonds different from investment grade corporate bonds?

Lower credit ratings
High Yield Bonds have lower ratings due to the potentially greater risk involved. This means that interest payments may not be made and even the principal may not be repaid.

Shorter maturities
These bonds are typically issued with shorter maturities. They are also less likely to have call protection, which means that if a company’s financial condition or credit rating improves, the issuer can call its outstanding bonds and take advantage of lower funding rates.

Emerging companies
While many high yield bonds are issued by former investment grade companies in decline, the high yield market also provides financing opportunities for emerging companies seeking working capital for expansion or to fund acquisitions.

High yield bonds hold the potential for higher returns for two reasons.

Higher coupon rates
In general the issuers of high yield bonds are considered less likely to make interest payments than issuers of investment grade corporate debt. Because investors are being asked to assume this risk, high yield bonds tend to come with higher coupon rates, which can generate additional investment income.

Capital appreciation potential
Companies issuing high yield bonds have the potential to turn around their financial standing, creating the opportunity for investors to realize capital gains as bond values increase, due to improving business conditions or improved credit ratings.

High yield bonds are rated below Baa3 by Moody’s or below BBB- by S&P and Fitch. The lower credit ratings are assigned based upon the issuer’s ability to pay interest and repay principal, making these bonds a speculative investment.

Investment grade Moody’s Standard & Poor’s Fitch
Strongest Aaa AAA AAA
  Aa1 AA+ AA+
  Aa2 AA AA
  Aa3 AA- AA-
  A1 A+ A+
  A2 A A
  A3 A- A-
  Baa1 BBB+ BBB+
  Baa2 BBB BBB
  Baa3 BBB- BBB-

Non-investment grade Moody’s Standard & Poor’s Fitch
  Ba1 BB+ BB+
  Ba2 BB BB
  Ba3 BB- BB-
  B1 B+ B+
  B2 B B
  B3 B- B-
  Caa1 CCC+  
  Caa2 CCC CCC
  Caa3 CCC-  
  Ca CC CC
  C C C
Weakest   D D
Source: SIFMA, Fitch, Moody’s, Standard & Poor’s

Non-investment grade (secondary) search results may contain U.S. dollar-denominated foreign sovereign debt. See Risks for a discussion of risks associated with investments in foreign sovereign debt.

While it may seem appealing to look at bonds that offer higher yields, investors should consider those higher yields to be a sign of potentially greater risk. Below are some of the potential risks involved with high yield investing.

Default risk
Historically, the risk of default on principal, interest, or both, is greater for high yield bonds than for investment grade bonds. Moody’s data shows that bonds rated Ba had a 1.17% probability of defaulting within a year, whereas more speculative bonds rated Caa–C, had a one-year default probability of more than 17%. Investment grade bonds had less than 0.2% probability of a default within a year.1

Credit risk
High yield bonds are subject to credit risk, which increases as the creditworthiness of the issuer falls. It’s important to pay attention to changes in credit quality, as less creditworthy bonds are more likely to default on interest payments or principal repayment.

Business cycle risk
High yield issuers typically have riskier business strategies and more leveraged balance sheets, exposing them to greater risk of default at times of a downturn in business conditions.

Call risk
High yield bonds are more likely to have call provisions, which means they can be redeemed or paid off at the issuer’s discretion prior to maturity. Typically an issuer will call a bond when interest rates fall, potentially leaving investors with capital losses or losses in income and less favorable reinvestment options. Prior to purchasing a corporate bond, determine whether call provisions exist.

Make-whole calls
Some bonds give the issuer the right to call a bond but stipulate that redemption occurs at par plus a premium. This feature is referred to as a make-whole call. The amount of the premium is determined by the yield of a comparable mature Treasury security, plus additional basis points. Because the cost to the issuer can often be significant, make-whole calls are rarely invoked.

Event risk
A bond’s payments are dependent on the issuer’s ability to generate cash flow. Unforeseen events could impact their ability to meet those commitments.

Concentration risk
Excessive exposure to a specific market sector within any asset class could put investors at greater risk. It’s important to seek diversification across a wide range of issues and industries in order to reduce the negative impact of a default.

Equity correlation risk
The perception that high yield issuers may have trouble generating sufficient cash flow to make interest payments could make them behave like equities. In some cases, high yield bonds may fall along with equities during an economic or stock market downturn. This is a concern for investors using fixed income as a hedge against equity volatility.

Liquidity risk
High yield bonds that may have been easy to buy or sell when market conditions were calm can suddenly become very difficult to sell when volatility increases. Typically, the market for high yield bonds is less liquid than the market for investment grade or government bonds.

Interest rate risk
Although high yield bonds have relatively low levels of interest rate risk for a given duration or maturity compared to other bond types, this risk can nevertheless be a factor. As with all bonds, a rise in interest rates causes prices of bonds and bond funds to decline. Because credit and default risk are the dominant drivers of valuations of high yield bonds, changes in market interest rates are relatively less important. At the same time, a tightening in monetary conditions that usually accompanies a rise in the general level of interest rates may cause a lagging reaction by weaker credits because of their inability to find sufficient funding, which in turn weakens the balance sheet of the high yield entity.

Higher transaction costs
Due to a typically large spread between bid and offer prices, and higher transaction costs associated with less liquid securities, trading high yield bonds can be costly.

Research and monitoring demands
Current and accurate information can be more difficult to obtain for high yield bonds. Investors should conduct due diligence as they consider investment strategies and closely monitor the changing financial condition of the issuing company.

Foreign risk
In addition to the risks mentioned above, there are additional considerations for bonds issued by foreign governments and corporations. These bonds can experience greater volatility due to increased political, regulatory, market, or economic risks. These risks are usually more pronounced in emerging markets, which may be subject to greater social, economic, regulatory, and political uncertainties.

Investing in high yield bonds at Fidelity

You may search for and purchase high yield bonds at Fidelity.com, where you can choose the credit rating levels appropriate for your portfolio and risk tolerance. You can also research recent ratings actions before you buy, and evaluate the liquidity risk based on real-time Trade Reporting and Compliance Engine (TRACE)2 data.

Once you have made your purchase, we encourage you to sign up for Fidelity’s fixed income alerts to receive email notifications in the event one of your bond holdings is downgraded or placed on negative credit watch.

Next steps

Find high yield bonds. Choose from 40,000 new issue and secondary market bonds & CDs, and approximately 60,000 total offerings with our Depth of Book.

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the amount paid by a borrower to a creditor, or bondholder, as compensation for the use of borrowed money


maturity, maturity date(s)

the date on which the principal amount of a fixed income security is scheduled to become due and payable, typically along with any final coupon payment. It is also a list of the maturity dates on which individual bonds issued as part of a new issue municipal bond offering will mature


debt obligation/principal

an interest-bearing promise, to pay a specified sum of money (the principal amount) on a specific date; bonds are a form of debt obligation; categories of bonds are: corporate, municipal, treasury, agency/GSE



a government, corporation, municipality, or agency that has issued a security (e.g., a bond) in order to raise capital or to repay other debt; the issuer goes to an underwriter to get their securities sold in the new issue market; for certificates of deposit (CDs), this is the bank that has issued the CD; in the case of fixed income securities, the issuer of the security is the primary determinant of the security's characteristics (e.g., coupon interest rate, maturity, call features, etc.)



the percentage of return an investor receives based on the amount invested or on the current market value of holdings; it is expressed as an annual percentage rate; yield stated is the yield to worst — the yield if the worst possible bond repayment takes place, reflecting the lower of the yield to maturity or the yield to call based on the previous close


maturity, maturity date(s)

the date on which the principal amount of a fixed income security is scheduled to become due and payable, typically along with any final coupon payment. It is also a list of the maturity dates on which individual bonds issued as part of a new issue municipal bond offering will mature


call protection

provision of a bond that makes it non‐callable or not subject to a scheduled call, even though other early redemption provisions may exist as specified in the prospectus or official statement


Treasury inflation-protected securities (TRACE)

the Trade Reporting and Compliance Engine (TRACE) is the FINRA developed vehicle that facilitates the mandatory reporting of over the counter secondary market transactions in eligible fixed income securities



a reduction in the rating awarded a debt or equity security; a credit agency downgrades the debt of a company, municipality, or governmental entity indicating a potential deterioration in the financial situation of the issuer and its ability to meet its obligations in full and/or on time.; a downgrade suggests investors are less certain to receive interest payments and return of capital



the interest rate a bond's issuer promises to pay to the bondholder until maturity, or other redemption event; generally expressed as an annual percentage of the bond's face value


1. “Average Cumulative Issuer-Weighted Global Default Rates, 1970-2009,” Moody’s Investors Service, February 2010
2. Real-time and historical trade information provided by the Financial Industry Regulatory Authority (FINRA) Trade Reporting and Compliance Engine (TRACE) for corporate bonds.
In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk, liquidity risk, call risk and credit and default risks for both issuers and counterparties.