Credit spread is the product
A corporate bond yields more than a gilt of the same maturity. That difference — the credit spread — is compensation for two things: the chance the company defaults, and the chance you cannot sell when you want to.
Spreads are the market's real-time opinion of corporate health, and they move ahead of equity more often than people expect. Credit markets tend to notice trouble first because bondholders only care about being repaid, while equity holders are busy hoping.
Investment grade and the cliff
Rating agencies split the universe at BBB-/Baa3. Above it is investment grade; below is high yield. The split is not cosmetic — a great many institutional mandates are prohibited from holding sub-investment-grade paper, so a downgrade across that line forces mechanical selling by holders who have no discretion.
This makes the BBB tier structurally interesting and structurally fragile. It is the largest part of the investment grade market and the one that produces forced-seller dislocations in downturns.
Why retail investors mostly cannot buy them
Since 2010, most sterling corporate issues have carried a minimum denomination of £100,000, largely to sidestep retail prospectus obligations. The practical effect is that individual corporate bonds are out of reach for most people, and exposure comes through funds and ETFs instead.
Where they sit in the capital structure
Senior secured, senior unsecured, subordinated, and then equity. In a restructuring, that order determines who is made whole, who takes a haircut, who is converted into equity, and who is wiped out. Two bonds from the same issuer can have completely different outcomes. The document governing that — the indenture or trust deed — is the actual asset.
How you would actually trade it
For most people, a corporate bond fund or ETF. Check average credit quality, average duration and whether it is hedged to sterling — currency exposure can easily swamp the yield advantage on a global bond fund.
For direct holdings, a handful of retail-denomination bonds trade on the LSE's order book for retail bonds, and some platforms offer access to institutional lines in £100,000 clips.
Trading is by request-for-quote, not a continuous order book. Spreads are wider than equities and widen sharply in stress — often just when you want to sell.
What goes wrong
- Default risk is the obvious one, and recovery rates on unsecured debt have historically averaged well under half.
- Liquidity risk is the underrated one. Corporate bond markets can effectively close for days.
- Rating migration forces selling at the worst moment.
- Call features. Many bonds can be redeemed early by the issuer, which caps your upside when rates fall.
- Duration risk applies just as it does to gilts, on top of credit risk.
This entry describes how a market works. It is not a recommendation, a price forecast, or advice about whether this belongs anywhere near your money. How entries are written.