High Yield Bond Market: Features and Risks of a Growing Market

Abstract

Speculative-grade debt, in other words, debt rated below BBB or unrated debt, has had significant growth recorded in recent years, driven, among other factors, by its higher profitability compared with other investment assets, its relatively low default rates and the diverse economic sectors to which the issuers belong, which converts these securities into an attractive option for portfolio managers. The interest in these types of securities, also known as high-yield bonds, has moved somewhat to secondary markets, where the number of transactions has also increased, pushing up prices. All of this is generating a debate on the sustainability of the growth of this market. So, while some agents argue that in recent years the market for speculative debt has matured, others express doubts about whether the risks taken by investors by incorporating these high-yield, high-risk assets into their portfolios is being correctly assessed. The discussion is occurring at a time when there is clear interest at a European level in developing corporate debt markets as a source of additional corporate funding so businesses can reduce their reliance on bank financing. Given this background, this paper reviews the recent trends and the main characteristics of the markets for high-yield bonds and analyses the risk factors that could jeopardise their development and consolidation as a feasible source of funding for the real economy.