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Glossary
Instruments

Junk bond

A bond from a borrower the agencies think might not pay you back.

Rated below investment grade, and therefore forced to offer a much higher yield to attract anyone at all. The extra yield is compensation for a genuine probability of default, not free money.

Junk bonds behave far more like equities than like government bonds: they collapse in recessions, precisely when you wanted your bonds to be protecting you.

Figure

Normal, and inverted

Normal: longer pays moreInverted: longer pays less2 years30 years

Inversion means investors will lock in today's rate for a decade rather than roll short-term debt. They are betting rates, and therefore growth, will be lower later.

Why it matters

The spread between junk and government yields is one of the best real-time gauges of market fear.

The mistake everyone makes

Putting them in the 'bond' bucket of your portfolio and assuming they will act defensively. They will not.

Related terms

Credit rating
An agency's opinion on how likely a borrower is to default.
Bond
A loan to a company or government, traded like a security.
Correlation
The degree to which two things move together, from −1 to +1.

See Junk bond on a real company

SteadyShares pulls this straight from the filings for 1,100+ companies, alongside moat scores, DCF fair value and peer comparison. Free to look around.

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