What's the difference between investment-grade and high-yield 'junk' bonds?

The split is about credit risk, the chance the issuer fails to pay you back. Rating agencies like Moody's and S&P grade bonds. Investment-grade bonds (roughly BBB-/Baa3 and above) come from financially solid governments and companies and carry lower default risk and lower yields. High-yield or 'junk' bonds (BB+/Ba1 and below) come from shakier issuers, so they pay more to compensate you for a real chance of default.

High-yield bonds behave more like stocks than like safe bonds; they tend to fall when the economy weakens, exactly when you want your bonds to hold steady. That makes them a poor substitute for the stabilizing role most people want bonds to play. If you want your bond allocation to be the calm anchor of your portfolio, stick with investment-grade or Treasury exposure and take your risk on the stock side.