Junk Bonds

What Is A Junk Bond?

Junk bonds are debt securities issued by corporations with poor credit ratings, which means they yield more than investment-grade bonds because of their greater risk of default. Junk bonds are also known as high-yield or non-investment-grade bonds.

Junk bonds are generally classified as having credit ratings below Baa by Moody's Investors Services and BBB by S&P Global Ratings and Fitch Ratings, the three main credit rating agencies.

Advantages And Disadvantages Of Junk Bonds

In addition to their higher yield, junk bonds have some advantages over investment-grade bonds. For one thing, junk bonds historically correlate better with stocks rather than high-grade bonds but are generally less volatile than stocks, although they are more volatile than high-grade bonds. Since they carry high coupons, they yield more than dividend stocks without excessive risk.[1]

A major disadvantage of owning junk bonds is that they default much more often than investment-grade bonds.According to S&P Global's 2018 Annual Global Corporate Default and Rating Transition Study, which tracked corporate bond performance over a period of more than 30 years, the highest one-year default rate for bonds rated BB, B, and CCC/C were 4.22%, 13.84%, and 49.28%, respectively. By comparison, the highest one-year default rates for bonds rated AAA, AA, A, and BBB were 0%, 0.38%, 0.39%, and 1.02%, respectively.[2]

Investors can compensate for that risk by buying mutual funds and exchange-traded funds (ETFs) that invest in junk bonds, which have diversified portfolios of bonds managed by professional bond managers and credit risk experts.

Why Trade Shares with FXCM?

  • $0.00 Commission*
  • Mini Shares - Fractional Share Trading with minimum trade sizes of 1/10 of a share.
  • Low Margin Requirements

Rising Stars and Fallen Angels

Junk bonds are generally grouped into two categories, although both have similar risks.

Rising Stars

"Rising stars" are companies that have below investment-grade ratings often due to their relative youth and unproven track records. For example, Tesla, the electric vehicle manufacturer, is rated B2 by Moody's.[3] It is rated B-plus by S&P.[4]

Bonds of rising stars offer investors the opportunity to benefit both from high coupon payments as well as the possibility of credit upgrades, which often results in higher secondary market prices. The company may not be able to live up to its promises, so it may retain its junk status and possibly even default.

Fallen Angels

"Fallen angels" are companies that were formerly investment-grade but have had their credit ratings reduced to junk status. For example, Ford's credit rating was reduced to junk status, or Ba1, by Moody's in September 2019.[5] Likewise, S&P downgraded the auto giant to BB from BBB on 23 March 2020.[6]

Coincidentally, on that same day, the U.S. Federal Reserve said it would buy U.S. corporate bonds for the first time through the newly created Secondary Market Corporate Credit Facility (SMCCF), including "fallen angels." The Fed said it would buy investment-grade corporates as well as bonds that had been investment grade as of 22 March but had their ratings lowered as a result of the coronavirus pandemic and economic shutdown.[7]

Investors buy fallen angels believing that the bonds may return to investment-grade status, which would raise their secondary market prices. However, some fallen angels are on a permanent downslope regardless of economic conditions and may never return to their former status.


Junk bonds, also known as high-yield or non-investment-grade bonds, are debt securities issued by corporations with poor credit ratings. These bonds yield more than investment-grade bonds but also carry higher risk due to their greater propensity to default.

FXCM Research Team

FXCM Research Team consists of a number of FXCM's Market and Product Specialists.

Articles published by FXCM Research Team generally have numerous contributors and aim to provide general Educational and Informative content on Market News and Products.



Retrieved 17 Sep 2020 https://www.thebalance.com/what-are-junk-bonds-pros-cons-ratings-3305606


Retrieved 17 Sep 2020 https://corporatefinanceinstitute.com/resources/knowledge/trading-investing/investment-grade-bonds/


Retrieved 17 Sep 2020 https://www.moodys.com/search


Retrieved 17 Sep 2020 https://cbonds.com/news/1268379/


Retrieved 17 Sep 2020 https://www.barrons.com/articles/ford-bonds-credit-rating-cut-to-junk-by-moodys-51568066409


Retrieved 17 Sep 2020 https://www.morningstar.com/articles/986638/what-fallen-angels-have-to-offer


Retrieved 17 Sep 2020 https://www.federalreserve.gov/monetarypolicy/smccf.htm

${getInstrumentData.name} / ${getInstrumentData.ticker} /

Exchange: ${getInstrumentData.exchange}

${getInstrumentData.bid} ${getInstrumentData.divCcy} ${getInstrumentData.priceChange} (${getInstrumentData.percentChange}%) ${getInstrumentData.priceChange} (${getInstrumentData.percentChange}%)

${getInstrumentData.oneYearLow} 52/wk Range ${getInstrumentData.oneYearHigh}

When executing customers' trades, FXCM can be compensated in several ways, which include, but are not limited to: spreads, charging commissions at the open and close of a trade, and adding a mark-up to rollover, etc. Commission-based pricing is applicable to Active Trader account types.

Any opinions, news, research, analyses, prices, other information, or links to third-party sites contained on this website are provided on an "as-is" basis, as general market commentary and do not constitute investment advice. The market commentary has not been prepared in accordance with legal requirements designed to promote the independence of investment research, and it is therefore not subject to any prohibition on dealing ahead of dissemination. Although this commentary is not produced by an independent source, FXCM takes all sufficient steps to eliminate or prevent any conflicts of interests arising out of the production and dissemination of this communication. The employees of FXCM commit to acting in the clients' best interests and represent their views without misleading, deceiving, or otherwise impairing the clients' ability to make informed investment decisions. For more information about the FXCM's internal organizational and administrative arrangements for the prevention of conflicts, please refer to the Firms' Managing Conflicts Policy. Please ensure that you read and understand our Full Disclaimer and Liability provision concerning the foregoing Information, which can be accessed here.

Past Performance: Past Performance is not an indicator of future results.

Spreads Widget: When static spreads are displayed, the figures reflect a time-stamped snapshot as of when the market closes. Spreads are variable and are subject to delay. Single Share prices are subject to a 15 minute delay. The spread figures are for informational purposes only. FXCM is not liable for errors, omissions or delays, or for actions relying on this information.