Junk Bonds

Sticking with stocks was a good idea this year. Sticking with junk corporate bonds was an even better idea. The junk, or high-yield, market has rallied powerfully since the stock market bottomed on March 9. Bond prices have surged, driving yields down sharply. The average annualized yield on an index of 100 junk issues tracked by KDP Investment Advisors has plunged to 10.53% as of Friday, down from an 18-year high of 17.7% in December.

Tired of being on the outside looking in at the scads of money being made by corporate takeover artists and hedge funds? It's easy enough to be part of those booms. By buying into mutual funds that own either high-yield bonds or high-yield bank loans, you can invest with the new movers and shakers in finance, who are ravenous for cash to bankroll their escapades.

Investors have lost their appetite for bonds tied to high-risk mortgages but are holding tight to corporate "junk" bonds and other securities that also are viewed as speculative bets. That has calmed fears on Wall Street that the turmoil in the U.S. mortgage business would spread, domino-like, through markets worldwide.

This won't make investors in high-yield junk bonds feel warm and fuzzy. "Frankly, we are all feasting off the imprudence of our lenders," said Steven Rattner, managing principal of private-equity firm Quadrangle Group, at a forum on hedge funds and private-equity investing in New York on Wednesday.

Canada's Quebecor Media has pulled a $750-million junk bond sale, the latest casualty of a more jittery U.S. high-yield market, KDP Investment Advisors said Wednesday. A unit of Quebecor Inc., Quebecor Media announced the debt sale Monday, a day before fresh worries about the U.S. sub-prime mortgage crisis sparked another sharp sell-off in high-yield bonds. Quebecor Media owns Canada's largest national chain of tabloids and community newspapers.

U.S. junk bonds sold off sharply Friday as investors continued to pull back from high-risk securities. Analysts said renewed fears this week about a prolonged meltdown of mortgage-related bonds backed by sub-prime loans was triggering selling in the junk bond market as well. As prices fell, yields on junk bonds surged. The annualized yield on an index of 100 junk issues tracked by KDP Investment Advisors rocketed to a 12-month high of 8.12% from 8.02% on Thursday. The yield had been 7.

The cost of raising money in the junk bond market continued to surge Monday, spurring online travel firm Expedia Inc. to sharply scale back plans to borrow money to buy back stock. Also Monday, Allison Transmission, a General Motors Corp. unit that makes automatic transmissions for trucks and buses, postponed a sale of $3.5 billion of loans, said Leveraged Commentary & Data, a Standard & Poor's publication. The loans would have helped pay for the unit's $5.

The private equity boom that has helped drive the 4 1/2 -year-old bull market in stocks is facing severe pressure as investors chastened by the sub-prime mortgage debacle balk at financing risky deals.

Bond defaults by companies with speculative-grade, or junk, credit ratings are likely to triple over the next year, Moody's Investors Service said Tuesday. The default rate is expected to climb from an estimated 1.4% of outstanding junk debt this year to 4.5% in 2008 and 5.6% in 2009, according to Moody's. The default rate probably would climb even higher if the economy were to go into recession, said Daniel Gates, Moody's chief credit officer for corporate finance in North America.

Investors in corporate junk bonds have recouped about half of their losses from the summer credit crunch. But some analysts warn that the plunge in high-risk bond prices in June, July and August could be a dress rehearsal for what the popular securities might face next year if the economy weakens substantially and more companies have trouble paying their debts. Defaults on junk bonds have been at two-decade lows, but virtually no one on Wall Street believes that can continue.