Has the junk bond bubble deflated?

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After this month's market gyrations sent high-yield bond prices sharply lower, some analysts believe the air has come out of the market.

"The bubble in 'junk' bonds appears to be deflating," John Higgins, an analyst at Capital Economics, said in a note Tuesday. "The spread over Treasurys of BBB-rated, 7-10 year bonds is currently close to its average of the past quarter of a century – the same could not be said, at least until recently, for the spreads of bonds lower down the credit rung."

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The spread between B-rated bonds and Treasurys had fallen to around 320 basis points in June, nearly 200 basis points below its 25-year average and not too far away from the quarter-century period's lowest-ever level of 250 basis points, he noted. But the spread has now climbed to around 430 basis points, he added.

Reading the moves in the junk bond market
Reading the moves in the junk bond market   

Fund managers view being long U.S. high-yield debt as a crowded trade, second only to being long the U.S. dollar, according to the results of the Bank of America-Merrill Lynch fund manager survey for October, released last week.

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The yields on high-yield bonds had become progressively less high, with the average yield on sector indexes falling to a nearly unprecedented below 5 percent in June, although they've since recovered to above 6 percent; bond yields move inversely to prices. Over the past three months, over $30 billion has flowed out of high-yield bond funds, according to data from Jefferies.

Some see the rise in yields as a signal to enter the sector.

"We now see risk/reward as more attractive than it has been in over a year," Morgan Stanley said in a note Monday, recommending overweighting the sector and moving down the rating spectrum from BB-rated paper into B- and CCC-rated paper. "High-yield is not only cheap in absolute terms for the first time in over a year, but it is now particularly attractive relative to most other asset classes."

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Indeed, U.S. credit investors are still fairly positive on high-yield bonds, with 41 percent of those surveyed in the Morgan Stanley global credit investor survey for the fall quarter, published last week, expecting them to outperform over the next six months, compared with 20 percent in the previous quarter.

Icahn: High yield market in bubble
Icahn: High yield market in bubble   

To be sure, just become some air has come out of the junk-bond market doesn't mean it isn't still puffed up.

Even Capital Economics' Higgins isn't certain the junk-bond selloff is done.

"The spread [between Treasurys and high-yield bonds] is still quite depressed by the standards of the past," Higgins said. "We would not be surprised if the spread rose further," he said, but added he doesn't expect the spread to surge.

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Of course, the selloff hasn't changed everyone's view on high-yield bonds.

"The high-yield market is in a bubble," storied activist investor Carl Icahn told CNBC. "That is a no-brainer," he said, although he added that he's losing money on his bet against the sector, which uses credit default swaps to play the difference between high-yield bonds and five-year Treasurys.

—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1