What are high yield bonds considered to be in terms of risk assessment by credit rating agencies?

High yield bonds are considered to be debt that is deemed riskier due to their lower credit ratings compared to investment-grade bonds. Credit rating agencies assign ratings based on the likelihood of default, and high yield bonds typically fall into categories rated below BBB- by Standard & Poor's or similarly by other agencies. This classification indicates that these bonds carry a greater risk of default, therefore they offer higher yields to attract investors willing to take on that additional risk.

The distinction lies in the bond's ability to provide safety and reliability versus its potential for higher returns at the expense of increased risk. High yield bonds serve a specific purpose in an investor's portfolio by allowing for potential capital appreciation and income, but investors must be cautious and assess the creditworthiness of the issuers.

In contrast, investment grade debt is viewed as safer, low-risk securities denote a lower chance of default, and government bonds are typically seen as risk-free or very low risk because they are backed by the government. Thus, it is clear why high yield bonds are characterized as having a higher risk profile.