What typically causes the prices of high-yield bonds to fall during economic downturns?

High-yield bonds, often referred to as junk bonds, are issued by companies with lower credit ratings. During economic downturns, these companies usually face increased financial pressure, leading to concerns about their ability to meet debt obligations. As investors reassess the risk, they often become more cautious about holding onto these bonds.

The primary reason the prices of high-yield bonds tend to fall during such times is that there are more sellers than buyers in the market. When uncertainty and fear permeate the market, investors may rush to sell their holdings to avoid potential losses, resulting in a surplus of available bonds. This oversupply drives prices down, as sellers are willing to accept lower prices to quickly liquidate their investments. Therefore, this dynamic creates a downward pressure on the prices of high-yield bonds, reflecting the increasing perceived risk associated with these investments during unfavorable economic conditions.

While factors like higher interest rates or government intervention can influence bond prices in general, the specific scenario of economic downturns and their impact on high-yield bonds is primarily linked to market behavior characterized by supply and demand dynamics.