Junk Bonds vs Investment-Grade Bonds: Yield and Default Risk
Short answer. Investment-grade bonds are rated BBB- or higher by S&P (Baa3 by Moody’s) and carry a low risk of default. Junk bonds, also called high-yield bonds, are rated BB+ or lower, pay higher interest to compensate for greater default risk, and behave more like stocks in downturns.
Side by side
| Junk (high-yield) bond | Investment-grade bond | |
|---|---|---|
| Credit rating (S&P) | BBB- and above | BB+ and below |
| Default risk | Low | Meaningfully higher |
| Yield | Lower | Higher: the extra is the credit spread |
| Behaviour in a recession | Tends to hold value; may rise as rates fall | Spreads widen; prices can fall sharply |
| Typical issuers | Large, stable companies, governments | Highly leveraged or smaller firms, fallen angels |
| Correlation with stocks | Lower | Higher |
| Role in a portfolio | Stability and income | Higher income with equity-like risk |
Which one fits you?
Lean towards Junk (high-yield) bond if…
- you want dependable income and capital preservation
- you need bonds that cushion stock declines
Lean towards Investment-grade bond if…
- you accept equity-like risk for higher income
- you can diversify across many issuers
Frequently asked questions
What is a fallen angel?
A bond that was investment grade but was downgraded to junk. Some institutions must sell, which can create bargains and volatility.
Who rates bonds?
Credit rating agencies such as S&P Global, Moody’s and Fitch. Scales differ slightly by agency.
Are junk bonds always bad?
No. They compensate investors for risk, and diversified high-yield funds have paid more than investment-grade debt over long periods, with larger drawdowns.
General education, not personal financial advice. Figures are typical US examples and vary by provider and year.