Strategists Prepare For Junk Bond Bubble

Junk-debt issuance is up 27% over 2006, and investment-grade credit slid 14%, according to Lehman Brothers. Is a junk-bond bubble in the making? Dan Fuss, vice chairman at Loomis Sayles, and Jack Malvey, chief global fixed income strategist at Lehman Brothers, agree that a cycle is indeed coming to an end -- the question is how big the decline will be.

The strategists joined "Street Signs" to offer their views -- and to reassure viewers that the "crash" might not be as bad as some fear.

CNBC's Erin Burnett pointed to Alltel's acceptance of a $25 billion buyout by TPG Capital and Goldman Sachs. Some analysts believe the wireless firm grabbed at a bird-in-the-hand offer that was lower than others -- but would deliver before a possible market downturn.

Fuss, who also manages the portfolio of the Loomis Sayles Bond Institutional fund, said he "was worried long before Alltel." He told Burnett that he is "amazed" the debt cycle has "gone on this far" -- and expects a rise in defaults. But Fuss said the end of markets is seldom a volcano, and this particular cycle carries the seeds of its own moderation, e.g., strong corporate earnings.

Malvey agreed with Fuss' "general sentiment." The strategist is "surprised that lower-quality assets have performed so well, for so long." He foresees a decline in the riskier high-yield asset class, but lamented that it's "hard to define exactly how big" the fall might be.


Malvey said that the market might see a spread crash as it did the second half of 1998 -- but he doubts there will be a "nuclear winter" like the high-yield market crash of late 1989 to 1990.