Investors might be forgiven for thinking that the financial world revolves around equities or, increasingly, Bitcoin, but in truth, the world’s bond markets are immeasurably larger and, for the first time in many years, exciting. As we stand in the summer of 2025, some bonds, especially those issued by corporations, have been having a good run lately.
This should not come as a surprise, as bonds tend to do well in an environment where interest rates are coming down, a prospect that is certainly relevant to UK investors. During August, the Bank of England cut interest rates for the third time in 2025 to 4%. Current market expectations are for a further two cuts in the next 12 months. The possibility of further interest rate cuts may prove positive for corporate bonds in the UK.
With interest rates expected to decline and yields at nearly 6% one particular category of corporate bonds - high yield bonds - presents an appealing option for income, diversification, and potential growth. Although risks such as inflation and defaults persist, active fund management can help mitigate these challenges and seize opportunities
High-yield bonds are investments in corporations with lower credit ratings, which means they carry higher risk. To compensate for this increased risk, these bonds typically offer higher coupon payments. These yields compare favourably with UK government securities, known as gilts, where yields are currently around 3.8% for 2-year maturities and 4.5% for 10-year maturities. As figure 1 shows, yields of six percent or more have been consistent in the high-yield corporate bond space for the last few years.
Source: Macrobond, 7 May 2024. Fed = US Federal
A Fed Hike is an increase in the main policy rate of the US central bank, called the US Federal Funds Target Rate
Corporate bonds are loans made to corporations in the US, the UK, and beyond. This asset class is often referred to as corporate credit. Issuers entities issuing such bonds range from those deemed, by independent ratings agencies, to have a lower risk of not paying the borrowing back classified as ‘investment-grade’ bonds, to higher-risk issuers. These higher-risk bonds, traditionally called ‘junk’ bonds, are more commonly known as high-yield bonds. Higher risk issuers must offer higher interest rates to compensate for the increased likelihood of default compared to investment-grade issuers.
In terms of ratings, the company must be rated at 'BBB' or higher by rating agency Standard and Poor's or 'BAA’ or higher by Moody's to be considered investment-grade, with most government bonds boasting multiple ‘A’ ratings. By contrast, anything rated below those ratings falls into the high-yield category, which includes bonds rated as low as C or CC. Crucially, the high-yield credit market is huge – the global market for these bonds is more than $2000 billion or $2 trillion.
One obvious reason for buying high-yield bonds is that they provide a higher income yield, currently nearly 6%. Even in the years between 2012 and 2021, when investors navigated a yield-starved investment landscape, the average coupon on global high-yield was 6.4%. That was 3.8% higher than global investment grade and 5% higher than gilts.
Of course, there are some not insubstantial risks associated with high-yield bonds, not least that investors might find defaults rising as an economy slows down. According to data from Moody’s, the average default rate for European high yield bonds over the past 10 years was 3.3%1 . Another obvious risk to watch out for is inflation. If inflation rates shoot up again, we might expect most, though not all, corporate bonds to fall in value as investors adjust their expectations for future returns and government bond yields start increasing again.
Nevertheless, despite these risks, the macroeconomic environment looks potentially appealing. Interest rates may continue falling, if only because UK inflation rates have fallen sharply (though they remain above the 2% target level). Defaults may start rising if there is a recession, but in that situation, the likelihood of interest rate cuts would grow.
Learn more about the Invesco High Yield Fund (UK) and Invesco Bond Income Plus Limited investment trust, which invest in high yield bonds.
Learn more about the Invesco Monthly Income Plus Fund (UK) which invests in high yield, investment grade and subordinated bonds.
High yield bonds are loans to companies that pay higher interest because they’re riskier, the company might be less financially stable and have lower credit ratings. Investors could receive more income, but there’s a greater chance the company could struggle to pay the loan back.
Corporate bonds are a type of investment where you lend money to a company for a set period of time. In return the company agrees to pay you regular interest and eventually repay the full amount you lent. They’re a way for companies to raise money, and for investors to earn income. They can range from low-risk (investment grade) to high risk (high yield) depending on the financial health of the company.
High yield bonds are riskier and may offer higher returns. They’re usually issued by companies with lower credit ratings. Gilts are UK government bonds. They’re considered very low risk and typically offer lower returns.
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