Junk Bonds Might Be Poised for Rebound

The corporate junk-bond market, in its biggest slump in a decade, may be ripe for a rebound, said Martin Fridson, chief high-yield strategist at Merrill Lynch & Co.

The junk market “is poised to bounce back,” Fridson said, just as it did after the recession of 1990 and after Russia’s debt default in 1998, which drove investors out of all but the safest U.S. government debt.

But Fridson, who was this week inducted into the Fixed Income Analyst Society’s Hall of Fame, said a rebound may require that short-term Treasury bond yields fall back below those on longer-term U.S. debt--a reversal of the so-called “yield curve inversion” that has been in place since early this year.

And that, in turn, may require that investors believe the Federal Reserve is poised to begin cutting interest rates to keep the economy from slowing too much, analysts say.

Junk bond yields have soared this year to their highest levels since the early 1990s, sending bond values crashing, as investors have fretted over rising credit problems among junk issuers in the slowing economy.

Still, Fridson said he was attracting sellout audiences on a recent road trip to discuss junk-bond investing. That suggests many investors are lining up to get back into the bonds, he said.

“At some point, investors will be prepared to speculate on a short-term turnaround in the market, at least,” he said.