High Yield Happenings: From ‘junk’ to ‘high yield’

In a recent High Yield Happenings, I was slightly unkind about the FT’s coverage of high yield. So, in the name of balance, I wanted to flag a genuinely good article: A second act for high-yield bonds: The ‘junk’ label has been left where it belongs.

Naturally, it was buried in a slightly obscure corner of the FT’s website. Positive articles about high-yield bonds do not earn the same billing as those that warn of imminent disaster. But it is well worth the scroll. It makes several important points about how the high-yield market has changed: 

• Credit quality is materially higher
• Its sensitivity to moves in government bond yield curves is lower
• A greater proportion of the market is secured
• Direct exposure to the two areas attracted the most concern, software and AI-related financing, is limited.

These are all important points. But chief among them is the improvement in credit quality. BB-rated bonds now represent 64% of the global high-yield market, up from around a third in the late 1990s¹.  

As the weighting towards higher-quality issuers has increased, so the market’s implied default rate, calculated by applying historic default rates to each rating category, has fallen. 

Increasing quality reduces chance of large default cycle in HY

Highest quality part of the market – BBs – have significantly increased their share of the market:

Source: ICE BofA Merrill Lynch Global High Yield Constrained Index as at 30 June 2026. The implied market one-year default rate is based on the median default rate for the period from 1981 to 2021 on data provided by S&P Global². 

A higher-quality market should, of course, experience fewer defaults. The more interesting question is whether investors are being adequately compensated for taking on what risk remains. 

According to data from S&P Global going back to 1981, the average annual default rate on BB-rated bonds has been just 0.6%2. Assuming a 40% recovery rate, which is broadly in line with the historic average, that equates to an average annual credit loss of 0.36%, or 36 basis points. The current spread on global BB-rated bonds, meanwhile, is approximately 185 basis points³.  

In other words, even with spreads towards the tight end of their historic range, investors are currently receiving extra yield equivalent to more than five times the long-run average annual credit loss. 

Spreads in high yield are equivalent to more than five times the average annual credit loss

Source: Artemis, S&P Global ratings (default rate) and ICE BofA Merrill Lynch Global High Yield Constrained Index (credit spread). Credit loss rate estimated using the historic average 40% recovery rate on defaults. 

That does not mean the difference between spreads and credit losses is ‘free’ money. Credit spreads also compensate investors for uncertainty, market volatility, lower liquidity, and the fact that defaults tend to arrive in clusters rather than in a slow, steady stream of 0.6% per year. And, of course, bonds that are BB-rated today can slip to become B-rated tomorrow. 

This is, however, a useful reality check on the idea that tight spreads automatically mean investors are receiving too little compensation for taking credit risk. This compensation, moreover, is being earned in a market that is higher quality, less sensitive to moves in government bond yields and has limited direct exposure to the areas (such as AI) currently generating anxiety-inducing headlines. 

Perhaps the FT is right, and high yield is entering its second act. Or perhaps ‘high yield’ has simply become a more accurate description than ‘junk’. 

Read more about recent happenings in high-yield: Why we steer clear of bonds directly tied to AI