High-yield bonds — also called junk bonds — are issued by companies with lower credit ratings (BB+ and below). Because these issuers are riskier, they must pay higher interest rates to attract investors. While an investment-grade company might pay 4% on bonds, a junk-rated issuer might pay 8-12% or more.
Michael Milken at Drexel Burnham Lambert pioneered the junk bond market in the 1980s, financing companies like MCI, Turner Broadcasting, and countless LBOs. The market grew from nearly nothing to hundreds of billions. Milken earned the title "Junk Bond King" before his 1989 indictment for securities fraud.
The global high-yield bond market exceeds $2.5 trillion. Default rates average 2-4% in normal times but can spike to 10-15% during recessions (12% during the 2008 crisis). Despite the risk, high-yield bonds have delivered average annual returns of 7-9% — attractive for investors willing to accept higher volatility and credit risk. The "spread" between junk and Treasury yields is a key recession indicator.