Why There Is a Lot Less Junk In the High-Yield Bond Market

Once known as junk bonds, the high-yield bond market has gotten a lot safer.

This market is home to debt issued by borrowers with lower relative credit quality and a higher relative risk of default, and it was long among the riskiest corners of the fixed-income universe. Fifteen years ago, 41% of the high-yield bond market was rated BB—the rung just below investment-grade bonds, which have a lower risk of default—or better. A decade ago, those bonds were 49% of the market. Today, the credit quality of the high-yield bond market has improved, with roughly 59% of the market rated BB or better.

But that doesn’t mean those low-quality issuers have gone away. For starters, there are still plenty of bonds in the high-yield market with higher default risks. That said, many low-quality issuers are raising money elsewhere—namely, the leveraged loan market and the private credit market, where they can borrow money at more flexible terms.

One reflection of the changed landscape can be seen in the impact of the bankruptcy of auto parts company First Brands. The company, which carried below-investment-grade ratings, borrowed heavily in the syndicated loan market, not the high-yield bond market. When First Brands defaulted in 2025, it was on its syndicated, or large-scale diversified, bank loans.

Thanks to this shift, the high-yield market is “much less risky now compared with people’s perception of what it was in years past,” says Shannon Ward, a portfolio manager at Capital Group who specializes in high-yield investing.

What Are High-Yield Bonds?

Across the market, one of the key risks in bond investing is an issuer’s ability to repay the money it has borrowed—a risk that is commonly assessed through credit quality. Ratings agencies assign bonds measures of credit quality, which reflect their assessment of the likelihood that the issuer will not default on the debt. The specific language used in the ratings schemas varies slightly, but the highest-quality debt—the least likely to default—carries ratings of AAA or AA. From there, the next rung is A and then BBB, which is considered the bottom end of the investment-grade bond market. (For a full list and explanation of bond credit ratings, see the table at the end of this article.)

The high-yield bond market—in the past, often called the junk bond market because of its low-quality issuers—comprises debt that carries below-investment-grade ratings, as well as a small percentage of debt that is not rated. The rating scales on high-yield debt begins at BB and runs through C-rated debt. There is a small amount of debt that is in default and rated D.

Historically, much of the debt issued in the high-yield market has been sold to finance corporate acquisitions, sometimes deals known as leveraged buyouts. Other companies will issue debt to fund dividend payments.

While the risk of default for high-yield bonds is relatively small—averaging in the mid-single-digit percentages of the market over time—there have been bouts of high levels of defaults. These episodes tended to be concentrated in industries that at the time had been heavy issuers of low-rated debt, such as telecom and media in 2001 and 2002, or energy companies in 2015 and 2016.

High Yield’s Changing Credit Quality

Over the decades, the composition of the high-yield bond market has evolved. It used to be defined by significantly higher interest rates than investment-grade bonds, which compensated investors for the greater risk of default. Today, there are still many low-quality bonds in the high-yield market, but there’s a lot less junk.

In the high-yield market’s early years, the vast majority of bonds carried a B rating. In 1990, for example, roughly two-thirds carried a B rating, 16% was rated BB, and 17% was rated CCC or below, according to data compiled by Vanguard. By 2000, using data for the Morningstar US High-Yield Bond Index, the percentage of bonds rated B was down to 55%, CCC or lower was about 8%, and B debt had risen to 36%. BB debt had grown to roughly 50% of the high-yield market, but over the last two years, the group occupies about 58%, with B-rated debt 32%.

“There’s been a significant shift in terms of the ratings quality of the overall market,” says Michael Chang, co-head of high yield and a senior portfolio manager at Vanguard.

Another difference is that in the past, the market has gone through periods when issuance would be dominated by a particular sector, which led to increased risks (and a spike in defaults) for high-yield portfolios when those sectors ran into problems. That was the case in 2000, when telecommunication and media companies were heavy issuers, or in 2014, which saw a large percentage of issues come from energy companies. “Over the last seven or eight years, there hasn’t been a sector that has been in vogue,” Capital’s Ward says. Instead, “it’s more of a normal cross-section of the US economy.”

Credit Risk Migrates from Bonds to Leveraged Loans

That credit risk didn’t vanish from the bond market. Instead, it gravitated elsewhere, especially toward the leveraged loan market. This market can be referred to in different ways: the bank-loan market, the broadly syndicated loan market (often abbreviated BSL), and for some kinds of debt, the leveraged loan market.

While always home to below-investment-grade company debt, aspects of the loan market have offered elements of safety to bond investors. For example, syndicated loans are collateralized debt, meaning there are real assets pledged to help pay back bondholders in the event of default. Second, leveraged loans carry floating rates, which offer investors protection against losses when interest rates rise.

“It was just taken for granted that a bank loan portfolio would be safer than a high-yield portfolio,” says Morningstar fixed-income senior principal Eric Jacobson. But over time, the underlying credit quality has trended significantly lower for leveraged-loan issuers. In 2016, the leveraged loan market was split almost evenly between B and BB-rated debt. But today, single-B debt or lower makes up more than two-thirds of the market, while BB or higher makes up roughly 30%. Jacobson says the dynamic between the two markets “has morphed.”

The Leveraged Loan Market Boom

The shifting dynamic between the high-yield and leveraged-loan markets has come at a time of tremendous growth in leveraged loans. The US High-Yield Bond Index totals roughly $1.45 trillion, having grown by more nearly 22% over the last decade and 65% since the end of 2010. Meanwhile, the leveraged-loan market has grown by roughly 90% over the last 10 years and more than doubled over the last 15. “There’s a large amount of overlap between those two markets, and so the growth of [leveraged loans] has definitely come at the expense of the high-yield market,” says Vanguard’s Chang.

Fund managers point to the issuer side of the equation as driving the shift away from the high-yield market for riskier borrowers. They say the primary reason is that the terms and costs of borrowing in the loan market can be more favorable to companies. “A lot of the [debt issuance] that used to happen within high yield … is now being done in loan form,” says Capital’s Ward. She says that includes financing for mergers and acquisitions, which for many years drove a large portion of high-yield debt. “That’s left the high-yield market with pretty high-quality companies” relative to the past.

Private Credit Gains

The other dynamic has been the significant growth of the private credit market. The private credit market consists of generally below-investment-grade loans and debt financing provided by nonbank lenders. In other words, the companies looking to raise money go straight to the end investors—generally large asset management companies—rather than banks.

As with leveraged loans, private credit has boomed in recent years. Traditionally, private credit had been the domain of companies that were not large enough to tap the high-yield market. A typical high-yield bond sale is in hundreds of millions of dollars. In addition, private lending typically does not require the level of disclosures that high yield bonds do.

But as the private credit market has grown, larger borrowers are seeing it as another option when raising money is required. “There is so much excitement around private credit,” says Capital’s Ward. “These issuers who used to come to the high-yield market are saying, ‘Maybe we are better off in the private credit market, where there is more flexibility on terms around borrowing money, particularly financial disclosures.’”

What It Means for Investors

Put these factors all together, and the result is a high-yield bond market that should be less risky than in the past. But that relative improvement comes with an important trade-off for investors when it comes to yields.

“The high-yield market is different today than it used to be, in a good way,” says Vanguard’s Chang. He says credit ratings are a good predictor of future defaults, and “it should translate into lower defaults in the future when we get into that next recession.”

However, Morningstar’s Jacobson has a word of caution for investors: “The overall market is less risky, but junk is junk. Compared with investment-grade debt, high-yield bonds are still going to be pretty risky—just not as much as they used to be, and now clearly less risky than the loan market.” Meanwhile, private credit in mutual fund form has its own long list of risks beyond credit quality, such as leverage and a lack of transparency around the pricing of the debt.

In addition, Jacobson notes that with the improvement in credit quality, the extra yield that investors earn for taking on the risk of high-yield bonds has come down. And overall, the environment of yield-spread environment has shrunken in the credit markets. “The fact that the index is generally higher quality than it was means the natural yield premium you’d expect is now lower to begin with,” he explains. “Putting aside the issue that bond market yields are lower on a secular basis than they were 10 years ago, the spread over Treasuries for the high-yield index is much tighter.” Overall, “You shouldn’t put a high-yield fund in your portfolio expecting it to add the kind of yield it would have 10 years ago.”

Credit Ratings Defined