A junk bond is debt that has been given a low credit rating by a ratings agency, below investment grade. As a result, these bonds are riskier since the chances that the issuer will default or experience a credit event are higher.
Companies that issue junk bonds pay these high-interest rates to entice investors to take on the higher risk of lending them money. Investments in junk bonds are used to gauge the risk appetite of investors. When there is much investment in junk bonds it suggests that investors are taking on more risk. This is usually associated when the market is in a bullish run. On the other hand, when investment in junk bonds is low, this suggests that investors are prioritizing safety over risk. This usually happens in a market downtrend
