The new investment advice is bonds. Bonds are supposed to provide stock-market returns over the next few years.

But watch out. Corporate defaults are rising faster than global temperatures. And that is if you still believe anything Moody's says.

Bonds may indeed have better returns than stocks but its still likely to be a bumpy ride.

Wave of Bad Debt Swamps Companies

By JEFFREY MCCRACKEN and VISHESH KUMAR

FEBRUARY 13, 2009

Wall Street Journal

The U.S. is entering a period likely to feature the most corporate-debt defaults, by dollar amount, in history. By various estimates, U.S. companies are poised to default on $450 billion to $500 billion of corporate bonds and bank loans over the next two years.

In percentage terms, the projections from the three main credit-rating agencies for defaults on high-yield bonds approach levels last seen in 1933, according to an 87-year default-rate history compiled by Moody's Investors Service. The agencies expect default rates on these non-investment-grade bonds to triple to about 14% or higher this year, from around 4.5% last year.

The coming default wave is another source of trouble for the global financial system, which already is grappling with hundreds of billions of dollars in defaulted mortgages, credit-card debt, student loans and other consumer debt. Corporate defaults threaten to hurt banks, pension funds and private-equity funds, which in recent years gobbled up high-yield corporate debt and pieces of bank loans.

Corporate defaults -- in which companies cannot meet interest or principal payments on borrowed money -- don't always result in Chapter 11 filings. Often borrowers can restructure their debts by working out new payment terms with lenders. Sometimes they agree to give lenders ownership stakes in exchange for reducing or eliminating debt. Such workouts can dilute or wipe out existing shareholders.

S&P estimates high-yield-bond default rates will hit 13.9% this year, but could go as high as 18.5% if the downturn is worse than expected. Moody's predicts a default rate around 16.4% this year. The default rates in recent downturns were 11.9% in 1991 and 10.4% in 2002, according to S&P. Such rates peaked at around 15% in 1930, according to Moody's. In 2007, when credit flowed freely, the default rate dipped below 1%, an all-time low.

This year, as of Feb. 6, 21 U.S. companies have defaulted on $43.1 billion of high-yield bond and bank debt, according to S&P. That is greater than the dollar value of defaults in 2006 and 2007 combined, and it's more than 25% of the $157 billion of high-yield-loan and bond defaults in all of last year.