Junk Bond

A junk bond, politely called a high-yield bond, is debt rated below investment grade, meaning below BBB minus at Standard and Poor's or Baa3 at Moody's. The rating signals a meaningful risk of default, for which investors demand extra yield. The high-yield spread over Treasuries typically runs a few percentage points in calm markets and has exceeded 10 points in crises like 2008.

Why it matters

Junk bonds finance companies that established credit markets would otherwise exclude, from leveraged buyouts to struggling incumbents to young firms. Michael Milken built the modern market in the 1980s on the observation that diversified portfolios of risky bonds historically overpaid for their actual default losses. The market's health is also a macro signal: widening junk spreads register tightening credit and often precede downturns.

For income investors, the sector is a study in asymmetry, steady coupons in good times, sharp principal losses when defaults cluster. Default rates that run near 2 percent in expansions have spiked far higher in recessions, concentrated exactly when other assets are falling.

In the gold vs bitcoin debate

Junk bonds sit at the far end of the counterparty-risk spectrum from gold and bitcoin, offering maximum yield in exchange for maximum dependence on someone else's promise. The comparison clarifies what yieldless assets actually sell: gold and bitcoin pay nothing because nobody owes their holders anything, and in credit crises, when junk spreads blow out, that absence of a promisor is precisely what investors suddenly want.