Deluge Of Defaults

Corporate bond markets have climbed higher in recent months, but the rate at which companies miss bond payments has also surged. Another 18 companies defaulted on their debt in June, according to the rating agency Standard & Poor's, pushing the default rate to 9.16%, a new high for the year. The rate in June of last year was 2%.

Among the better-known companies to default last month: retailer Eddie Bauer ( EBHI - news - people ), car seat makerLear Corp ( LEA - news - people ) and General Motors (GMGMQ - news - people ). S&P expects another 84 low-rated companies to default before the end of the year, which translates to a 14% rate. The worst-case scenario has the rate hitting 18.5% if the economy sinks further.

The trend presents another risk for investors who put their savings in bonds and fixed-income mutual funds now. Bond markets often fare better emerging from a recession and offer better protection than stocks--and they've handily beaten stocks so far this year. Investment grade bonds are up 12% and speculative, high-yield bonds are up 22.3% in the past three months, according to Merrill Lynch data; the S&P 500 gained 11.3%, including dividends. But higher default rates guarantee that some of the speculative-grade bonds retail investors buy will wind up worthless.

Research firm CreditSights sees airlines, media and cable operators as some of the most dangerous to investors. (See"Sectors On The Verge Of Collapse.") At-risk companies include Air Canada, newspaper chain McClatchy ( MNI - news- people ) and Clear Channel ( CCU - news - people ).

The interest rates that companies have to pay to borrow on bond markets is still high. If there's a bright spot, it's that yields have dropped enough to encourage the new issue market, says S&P. That has helped some companies, such as broadcaster Univision Communications, refinance debt and stay afloat. (See "Univision Branches Out With Bonds.") New junk-bond sales reached $52.9 billion in the first half of the year, compared with $32.3 billion last year. Similarly, investment-grade companies sold $525 billion in the first half, up from $474 billion during the same period last year.