High Yield Spread:

Definition:
High-Yield spread is the additional interest rate that lenders charge to less creditworthy borrowers.
If we want to rank the borrowers, on top of the list are governments, then large and stable corporations, followed by smaller and growing corporations. The creditworthiness decreases as we go down this list.
The borrowers who are less creditworthy have to issue bonds that are generally known as junk bonds (in nicer words, ‘high-yield’ bonds; higher the risk, higher the return.) These bonds have lower credit ratings as ascribed by credit rating agencies. (Sidenote: The top credit rating agencies in the world are: Moody’s, Standard & Poor’s (S&P), and Fitch.)
But more important than the rating is the due diligence of the lender into the financial strength and the prospect of growth of the borrower. Based on the findings and the risk-return principle, the lender will add a layer of additional interest (spread) on top of what is charged to higher quality borrowers. This spread is called High-Yield spread.

Behavior of High Yield Spread:
As discussed, the spread is determined following due diligence done by the lender and varies case-by-case. However, generally speaking, the spread rises when the economic outlook deteriorates. The reason is that when the economy is weak, smaller companies are the first casualties or at least they cannot prosper as they hope so. In face of uncertain economic conditions, the lenders usually add to the spread.
On the other side of the coin, when economies are doing well, the High Yield spread narrows.

Investment Strategy:
A good strategy is to buy junk bonds toward the end of the expansion cycle when the spreads are wide and sell them when the economic conditions are getting better (and spreads start to compress).