Rising interest rates are putting pressure on junk bonds, also known as high-yield bonds. These bonds, which are issued by companies with lower credit ratings, offer higher yields to compensate investors for the increased risk of default.

However, as interest rates rise, the relative attractiveness of junk bonds decreases. Investors may shift their investments to safer, higher-rated bonds or other fixed-income securities that offer comparable yields with less risk. This can lead to a decline in the value of junk bonds.

Several factors contribute to the sensitivity of junk bonds to interest rate changes:

• Inverse Relationship: Bond prices and interest rates generally have an inverse relationship. When interest rates rise, bond prices tend to fall, and vice versa.
• Risk Perception: Rising rates can signal a tightening of monetary policy or concerns about economic growth, which can increase investors’ risk aversion. This can lead to a sell-off in riskier assets like junk bonds.
• Alternative Investments: Higher interest rates make other fixed-income investments, such as government bonds, more appealing, drawing investors away from junk bonds.

The impact of rising rates on junk bonds can vary depending on the specific bonds, the overall economic environment, and investor sentiment. However, it is generally a headwind for the asset class.