Why junk bonds deliver equity-like returns but with far inferior volatility, explains Saurabh Mukherjea

High-yield bonds, commonly called junk bonds, have historically offered investors a return profile that compares favourably with equities while experiencing lower volatility. Saurabh Mukherjea points to three features that help explain their appeal: coupon income, seniority in repayment and diversification.

Income is a central part of the return

Unlike investments that depend mainly on price appreciation, high-yield bonds provide coupons. These regular payments form an important part of the overall return and can help the asset class capture a substantial share of stock market performance over time.

Repayment seniority changes the investment profile

High-yield bonds also sit within a repayment structure that gives seniority a role in how investors are treated. That feature distinguishes them from equity and contributes to the different risk and return characteristics of the asset class.

A possible role in diversified portfolios

The combination of coupon income and repayment seniority can make high-yield bonds useful alongside other portfolio holdings. Diversification is another part of the case for considering them, as investors may use the asset class to broaden the sources of portfolio returns rather than relying only on stocks.

The key point is not that high-yield bonds eliminate risk, but that their historical record shows a way to pursue returns similar to a large share of equity-market returns with less volatility. Their usefulness therefore rests on how coupons, seniority and diversification work together within a portfolio.