What is the dominant credit concern for high yield bonds?

The dominant credit concern for high yield bonds is credit default risk. High yield bonds, often referred to as junk bonds, are issued by entities that are at a greater risk of defaulting on their debt obligations compared to investment-grade bonds. This increased risk is due to factors such as lower credit ratings, which indicate that the issuer may struggle to meet interest payments or repay the principal amount at maturity. Investors in high yield bonds demand higher yields as compensation for taking on this additional risk.

Credit default risk is the primary consideration for investors, as it directly affects the likelihood of receiving the expected returns from these bonds. In the case of defaults, bondholders may recover only a fraction of their investments or potentially lose their entire investment. This focus on credit default risk is crucial in assessing the risk-reward profile of high yield bonds as an asset class.

The other factors, while relevant to bond investing as a whole, play a secondary role in the context of high yield bonds specifically. Interest rate risk is a concern for all bonds, impacting their price as interest rates fluctuate, but it does not uniquely distinguish high yield bonds. Credit spread volatility is indeed important, particularly for assessing market conditions and investor sentiment, but is a broader concept that applies to various types of bonds