Credit Crunch Unearths Good Deals in Junk Pile

The market for junk bonds -- or non-investment-grade debt with high yields -- is "amazingly cheap," says Christopher Towle, partner and portfolio manager at investment firm Lord Abbett. "There's tremendous value out there."

After a seven-week selloff that began with problems in the subprime-mortgage market and trouble in the super-heated realm of corporate buyout loans, prices across the whole fixed-income universe headed south and yields surged.

Proceed With Caution

Non-investment-grade corporate bonds, rated double-B-plus or lower, that were offering just 7% yields in early June are now yielding anywhere from 8.5% to 10% or more.

A note of caution: Investing in junk bonds requires care. The market has worked hard to cast off a tarnished image created in the 1980s by the shenanigans of onetime industry giant Drexel Burnham Lambert and its junk chief, Michael Milken. But there's no telling for sure when the credit markets will find a solid footing.

Yet, "used responsibly, [high-yield bonds] are a good source of income with the risk and reward very appropriate," says Martin Fridson, publisher of research service Leverage World.

After polling experts, Barron's has come up with its own top-10 list of speculative-grade-rated bonds that appear to have value.

These bonds can be bought from places like Charles Schwab on inquiry and may be in the portfolios of various mutual funds, closed-end funds like Western Asset High Income Opportunity Fund and even an exchanged-trade fund, the iShares iBoxx $ High Yield Corporate Bond Fund (HYG), which closely mirrors average prices in the $1 trillion high-yield market.

Top Picks

Barron's top choices: General Motors Acceptance Corp. (GMAC) and EchoStar (DISH). General Motor Acceptance is just a notch below investment grade yet yields nearly 9%. EchoStar has an $18.8 billion market cap, $10.4 billion in annual revenue yet its bonds yield around 7.5%, down from a high of near 9%.

See the accompanying table for other candidates.