With interest rates stabilising and equity markets in flux, Australian investors are revisiting an old friend (or foe): junk bonds. These high-yield, high-risk corporate bonds, also known as ‘speculative-grade’ or ‘non-investment grade’ debt, have found fresh relevance in 2025 as investors hunt for yield beyond the usual suspects.
What Are Junk Bonds, and Why the 2025 Buzz?
Junk bonds are issued by companies with credit ratings below BBB- (S&P/ASX) or Baa3 (Moody’s). That doesn’t automatically spell doom—some are growing firms with temporary setbacks, others are legacy businesses facing disruption. But with the Reserve Bank of Australia (RBA) holding the cash rate at 4.35% through early 2025 and inflation sitting stubbornly above target, the hunt for extra income is intense.
- Yield Appeal: In April 2025, average yields for Australian high-yield bonds hovered around 7.2%, compared to just 4.1% for investment-grade corporate debt.
- Issuer Activity: New junk bond issuance hit a post-pandemic high in Q1 2025 as mid-sized firms sought capital for expansion or refinancing.
- Global Factors: US and European high-yield markets influence local sentiment, especially as global risk appetite ebbs and flows with geopolitical news.
This environment has lured both retail and institutional investors, especially those frustrated by lacklustre term deposit and blue-chip dividend yields.
2025 Policy Shifts and Regulatory Trends
The regulatory landscape for junk bonds in Australia has evolved in 2025. ASIC’s updated ‘Product Intervention Powers’ now require clearer disclosure of credit ratings and default risks for high-yield bond products offered to retail investors. Meanwhile, the Australian Prudential Regulation Authority (APRA) has tightened rules on what banks can count as capital, leading some regional banks to offload non-core high-yield assets.
- Transparency Boost: All new retail bond prospectuses must include a ‘worst-case scenario’ analysis as of March 2025.
- ETF Growth: Several ASX-listed high-yield bond ETFs have launched, providing diversified access with daily liquidity, albeit at a management cost.
- Superannuation Exposure: APRA’s review of super funds’ allocations to speculative-grade debt has prompted some funds to reduce exposure, citing member risk profiles.
For investors, these shifts mean more information—but also a reminder that high yields come with very real risks.
Weighing the Risks: Who Should (and Shouldn’t) Consider Junk Bonds?
Junk bonds are not for the faint-hearted. Historical default rates for global high-yield bonds average around 3-5% per year, but can spike during recessions. In 2024, several high-profile collapses in the Australian retail and construction sectors sent ripples through junk bond portfolios, underlining the sector’s volatility.
Consider these factors before diving in:
- Credit Risk: If the issuer’s business worsens, bondholders risk delayed payments or total loss.
- Liquidity Risk: Junk bonds can be hard to sell quickly without taking a price hit, especially in volatile markets.
- Interest Rate Risk: Rising rates may erode bond prices, though high-yield bonds can sometimes outperform during moderate rate hikes if the economy holds up.
Who might consider them?
- Experienced investors with a high risk tolerance and a diversified portfolio
- Those seeking higher income and willing to accept volatility and potential losses
- Investors using ETFs or managed funds for diversification, rather than picking individual junk bonds
On the other hand, retirees relying on stable income, or anyone needing short-term liquidity, may want to steer clear.
Real-World Examples: Successes and Cautionary Tales
In 2025, Australian logistics firm MoveIt Pty Ltd issued a $150 million junk bond at a 7.5% yield to fund a warehouse expansion. Early buyers have seen steady income, but the bond’s price dipped 12% in March after a profit downgrade. Conversely, a 2022-issued junk bond from retail chain UrbanX defaulted in late 2024, with holders still awaiting recovery of even a portion of their principal.
Meanwhile, the Betashares Australian High Yield Bond ETF (ASX: XHYB) has attracted strong inflows, but its price fluctuated more than traditional bond funds during the recent market wobble.
