Investment-grade and non-investment grade debt
Bond investors have options when it comes to structuring their fixed income portfolios. They may invest in debt that’s rated investment-grade or non-investment grade (or junk-rated).
Investment-grade debt has a lower risk of default compared to non-investment grade debt (or junk debt). You should require a higher return on junk-rated debt compared to investment-grade debt to adequately compensate you for the higher risk.
In this series, you’ll read about primary and secondary market activity in non-investment grade debt, including both high-yield bonds (Parts 2–4) and leveraged loans (Parts 6–7). You’ll also read about current factors driving yields and returns for these debt securities (Part 5).
What are high-yield or junk bonds?
High-yield bonds or junk bonds are rated below investment-grade—for example, BB+ and below—as per the Standard & Poor’s ratings system. Credit ratings are assessments made by ratings agencies like Standard & Poor’s and Moody’s that provide an opinion on the issuer’s ability to make the scheduled interest and principal payments.
Higher ratings imply lower credit or default risk, while lower ratings imply the opposite. As high-yield debt is issued by lower-rated borrowers, they’re deemed to have high credit risk.
ETFs like the iShares iBoxx $ High Yield Corporate Bond ETF (HYG), the SPDR Barclays Capital High Yield Bond ETF (JNK), and the SPDR Barclays Capital Short Term High Yield Bond ETF (SJNK) invest primarily in debt issued by high-yield corporate borrowers. SJNK, JNK, and HYG have holdings in companies like Sprint.
Primary market activity includes raising debt in capital markets by corporate borrowers. Secondary market activity implies trading the debt in financial markets, and price-yield and returns analysis.
Primary market activity in high-yield bonds
Last week, high-yield borrowers like T-Mobile (TMUS) and S&P 500 Index components (SPY) like Frontier Communications (FTR) took recourse to the debt markets. Debt issuance reached the second-highest weekly level in 2014. You’ll read more in the next part.