Like most investments with higher credit risk, the high-yield bond market took a huge hit in 2008 as investors fled to quality. But with the sector recently seeing its deepest discount ever - and even rallying a bit - some say it's time to test the waters again.

"The values are just extraordinary," says Martin Fridson, CEO of Fridson Investment Advisors and a high-yield bond specialist. "I think it's an opportunity you're not going to see very often in your lifetime."

Fridson says the spread between high-yield bonds and treasuries over the last few months has been far beyond anything seen before. The option adjusted spread, which measures the difference, is about 17.6 points, according to Merrill Lynch data. A year ago, the spread was 8.2 points.

Lower valuations mean more upside, Fridson says, but they're also the reason for investors' hesitations. Default rates will likely run higher than during past recessions, he notes, partly because the quality of the sector has deteriorated since the last low cycle.

Lawrence Jones, associate director of fund analysis at Morningstar, said some experts he's spoken with expect default rates, which have run between 2% and 3% the last few years, to reach between 10% and 15%.

"I see the opportunity," Jones says, "but almost everyone who's being straight with you will say there's a lot of risk."
You may know them as "junk"

High-yield bonds, or "junk" bonds, are defined by the industry as a bond with below a Standard and Poor's BBB- rating. They have a higher risk of default (failure to make a scheduled interest or principal payment), and are subject to greater price swings than more highly rated bonds. But on the upside they also have a higher rate of interest.

Jones suggests making high-yield bonds a small part of your portfolio through bond funds run by experienced managers and research teams investing in better-quality high-yield securities. A fund provides the advantage of a manager's expertise and also the diversification that's needed to limit the risk of default in any single investment. And high-yield bonds can be highly illiquid, i.e., hard to unload if they're thinly traded, but a fund gives you the security of getting in and out when you want.

A small and relatively new entry, which has benefited through conservative investing, is the Intrepid Income Fund. It isn't limited to high-yield - it also holds investment grade and convertible bonds. Morningstar doesn't rate the fund, but it calculates its year-to-date returns at 5.65%, beating out the high-yield sector average of 3.38%. One-year returns fell 7.05% but were well above the category's drop of 21.14%.

Intrepid Income has a greater percentage of its assets in higher-quality debt than is typical for the high-yield bond category, says Jones. About 20% of its assets are in cash, according to Morningstar, which he believes tempered the fund's 2008 loss because the cash held up as the high-yield bond market collapsed. But the fund is not quite two years old, Jones notes. "It's not clear to me whether they're good fund managers or lucky managers," he says.
0:00 /1:19'Should I buy muni bonds?'

Of course fund managers Jason Lazarus and Ben Franklin think there's more than luck involved. They say they can spend more than 60 hours researching one name for their fund, which has $37.5 million in assets under management.

"We like to pride ourselves on not being economists," says Franklin. "We're bottom-up fundamental research analysts."

The fund has only about 30 names in its portfolio and holds concentrated positions in each one. The concentrated positions do, however, reduce diversification. "The reason that we do that is because we can be very confident in the few names that we do own," Lazarus says.

In selecting investments, they consider credit metrics, such as leverage ratio. They look for companies that can cover their interest expenses by a healthy margin to make sure they're going to get repaid in any climate. And while some funds anticipate defaults in their portfolios this year, Lazarus and Franklin expect to avoid these landmines.

The bulk of their work is qualitative, as they try to determine the quality of management, direction of the company, and how cash flows are going to trend over the course of a business cycle. They look for businesses they think will do well in any environment, and they like bonds with short durations (less than five years). Longer-duration bond prices generally fluctuate more with interest rate changes, they say. It also allows them to be more certain in their short-term outlook.

Because Intrepid Income is a small fund, Lazarus and Franklin can invest in issues with about only $150 million in bonds outstanding, while a larger fund wouldn't be able to establish a meaningful position in an issue that small. Fridson says it's hard for large funds to avoid looking like an index. Smaller funds may be able to underweight the less attractive industries, which is harder to do as a fund gets larger.
What catches Intrepid's eye

Here's how their thinking plays out in some of Intrepid Income's representative holdings: (Note that individual investors shouldn't invest in any single junk bond because the risk is too great.)

Silgan Holdings: manufactures metal and plastic containers for companies like Campbell's.

"We like seeing a company that has recurring revenues that we can trust even in a down market," says Franklin. "Many of these companies like Silgan, their operating margins aren't huge, but they're sufficient and we think they'll be able to survive in any situation."

Phillips Van Heusen: one of the world's largest apparel companies.

"We like them because they actually can almost cover their entire amount of debt with cash alone," Lazarus says. "And while we believe they probably won't do that, they may do a strategic acquisition."

Prestige Brand Holdings: makes and sells household names like Comet, Clear Eyes, and Chloraseptic.

"They don't manufacture anything themselves," says Franklin. "They outsource everything. They have almost zero capital requirements to put back into the business. That allows them to use all their free cash flow for acquisitions or paying down debt."

Rent-A-Center: runs a rent-to-own business.

"That bond actually has a one-year to maturity, which is definitely a feature we like," says Lazarus. "It's capitalizing on that sort of customer that wants to go out and buy a TV or needs to buy say a new washing machine or refrigerator but can't get financing from say, Home Depot."

Auto sales in the first two weeks of March were down 40% compared to the same period last year, according to industry analysts at J.D. Power and Associates.

Over the entire month, car dealers are expected to sell 633,000 cars and trucks to retail customers. That's compared to 1.07 million retail sales in March 2008. Including fleet sales, J.D. Power expects a total 798,000 new vehicle sales in March. That would translate to annual sales for the year of about 9.2 million new cars and trucks. In 2008 automakers sold a total of 13.2 million vehicles despite a sharp falloff in sales during in the last few months of the year.
0:00 /3:41R.I.P. family car dealership

J.D. Power analysts don't expect the market to stay quite this bad, however.

"We're still seeing economic headwinds and reduced consumer demand for new vehicles, making it a tough marketplace,"said Gary Dilts, senior vice president of global automotive operations at J.D. Power and Associates. "However, we anticipate that improvements on Wall Street and a boost in consumer confidence will help to bring the market back.

In February, sales were down 41% compared to the previous year, with the worst declines seen among U.S.-based automakers Ford (F, Fortune 500), General Motors (GM, Fortune 500) and Chrysler.

Arrogance. Incompetence. Greed.

That's what Rep. Paul Hodes, D-N.H., said AIG stands for during Wednesday's congressional circus, uh, hearing about the now notorious $165 million in bonuses.

Well, many Buzz readers have a message for Hodes, the rest of Congress, the Federal Reserve and the Treasury Department. A lot of them think that the government is just as arrogant, incompetent and greedy as all those credit-default swap peddling geniuses in AIG's London and Connecticut financial products offices.

Earlier this week, I wrote about what I thought was the real AIG outrage: the fact that the $165 MILLION in bonuses was overshadowing the need to sell AIG assets so taxpayers could get back the $170 BILLION in bailout money. At the time, I asked readers what they thought the government should do about AIG.
0:00 /02:45The rage over AIG

Many readers seemed just as angry at Washington (if not more so) than they were at AIG. Here's a sampling of some of the comments from readers on our Talkback page.

"Here we go again, politicians putting on the show for the public. AIG bonuses, 165 million to losers that helped cause the recession. OK big shot politicians, where the hell is the other 99.9 percent of the 170 billion you gave AIG. One tenth of one percent isn't cutting it. That just gets you on the news." That was Jim from Fox Island, Wash.
Talkback: Who deserves more blame for the AIG mess: the company or the government?

Amen, Jim. If politicians want to be outraged about something, they should be angered that AIG has so far been unable to sell off the pieces of itself that still have value. (Or perhaps unwilling to accept bargain basement prices.) The problem isn't the bonuses. The problem is that there seems to be no plan to get even a fraction of the money lent to AIG since September returned to taxpayers.

That's exactly what Doug in Mentor, Ohio wants to see done.

"Don't give them anymore money. And then figure out a way to dismantle AIG and sell the parts to other insurance companies, which there a lot of. Money made on sales can go toward repayment of the monies lent. If AIG fails, tough," he wrote.

I agree with Doug to a point. I don't think that letting AIG fail is a smart idea since the government has already put in so much effort to keep it afloat. It's too late to be having the argument about whether AIG should be allowed to fail.

Plus, for all the anger about AIG, which unfortunately has even led to death threats (that's going WAY too far), it's worth pointing out that there a tens of thousands of hardworking AIG employees who've done nothing wrong. Don't punish the entire company for the mistakes of a few.

People who sell AIG auto insurance policies and annuities, for example, had nothing to do with the exotic financial instruments that have brought the company to its knees.

Another reader is ticked off that it took so long for Congress to notice the bonuses and thinks that the current outcry is just a way for lawmakers to shift the blame for the botched bailout.

"So Congress has the temerity to pretend to be outraged over the PUBLISHED contractual obligations of a company that it acquired with taxpayer money after passing a boondoggle bill with nearly 9000 earmarks in it even after the head of their party said that those days were OVER???? Give me a break. We have a government made up of mendacious hypocrites!!" wrote Bob in Macon, Ga.

Bob has a great point. Somebody in Congress should have made an issue of this much earlier. And I also think that as much as the new administration is talking about change in the nation's capital, it's hard not to think that it's still just business as usual in Washington, especially at Capitol Hill.

Finally, Bob deserves high praise for his use of the word mendacious. It's a great word.
Readers angry at Geithner too

Congress isn't target of criticism from Buzz readers. Many are also quite annoyed with Treasury Secretary Tim Geithner.

Geithner is in a particularly tough spot since not only is he facing questions about when he did or didn't know about the AIG bonuses in his role as Treasury Secretary, Geithner was also the one who spearheaded the first bailout of AIG last September when he was the president of the Federal Reserve Bank of New York.

"Fire Geithner. He ran the Fed Bank of NY during the six years when all of this financial mess was created. He couldn't see what was happening then and still can't now as evidenced by this latest fiasco," wrote AJ in El Dorado Hills, Calif.

Scott in Indianapolis adds that "considering that Geithner authored the AIG bailout plan, and Congress gives themselves raises as the government loses money (hand over fist) every year, why isn't the public outrage directed at these two entities as well? I find it very ironic when the same people that create a negative situation suddenly act appalled by it."

Well, it does seem like there is a growing backlash against Geithner (who a couple of readers also derisively referred to as TurboTax Tim in light of the tax issues that came up during his confirmation hearing.)

President Obama has so far pledged support for Geithner, and I don't think he will be fired. But so far, the Treasury Department under Geithner is showing as much (or little) skill handling the bailout as it did under former Treasury Secretary Henry Paulson. It's obviously a huge undertaking. And some of the criticism of Geithner, and Paulson for that matter, is a tad unfair.

But there have been too many missteps. And it's understandable people are angry about it. The bottom line is that it appears that the government, in its rush to save AIG following the collapse of Lehman Brothers, may not have thoroughly thought through the unintended consequences.

"The REAL outrage should be expressed by the TAXPAYER whose government heaps money on companies without knowing where the bailout money is going or how the bailout is going to be spent. The SIMPLEST of due diligence by the government was obviously NOT DONE! Our government officials should take a part of the blame - They gave taxpayer money away without question," wrote Tom in Pittsburgh.

Spike in Pensacola, Fla. sums it up best.

"I think it's pretty amazing that our elected officials that approved the bailout money are surprised at how it's being used. When I borrow money, I usually have to fill out a lengthy application stating what I intend to do with the money if I get it. I guess our elected officials just handed over $170 billion and said "surprise us". See how well it worked," he wrote.

Anger over $165 million in bonuses doled out to American International Group senior employees reached a fevered pitch on Monday, prompting the Obama administration to vow to recoup the money and a New York prosecutor to subpoena the firm for recipients' names.

President Obama said Monday that he has asked Treasury Secretary Tim Geithner to use the government's role as a majority owner of the troubled insurance company and "every legal avenue" to stop the bonuses.

"It's hard to understand how derivative traders at AIG warranted any bonuses," Obama said.

But the bonuses -- set out in contracts made before the government became so deeply involved in the company -- would be hard to reverse.

In fact, a Treasury official confirmed to CNNMoney.com that the government can't stop the bonuses from going to employees. But it could try to recoup the money.

Treasury plans to make $30 billion in bailout funds pledged on March 2 contingent on a promise by AIG to reimburse the government an extra $165 million for the bonuses, according to the Treasury official.

The government has stepped in four times to help AIG through $170 billion in bailout packages, in large part because it had issued risky credit default swaps -- a kind of insurance for bad loans made by banks and investment companies.

It remains to be seen how much of those billions the government will be able to get back.

"If the market stabilizes, there could be valuable assets at the end of the day, but there's a lot of ifs," said Rob Haines, an analyst with research firm CreditSights.

For its part, AIG said it had no plans to try to rescind the bonuses, part of $450 million paid out in 2008-09 to employees in AIG's key financial products division. An AIG spokesman on Monday referred to a letter Chief Executive Edward Liddy wrote to Geithner last week saying that he found the bonuses "distasteful" but the company "must proceed with them."
'Taxpayers have a right to know'

Meanwhile, New York Attorney General Andrew Cuomo said on Monday that he planned to subpoena AIG for details of the employee bonuses.

"We believe the taxpayers have a right to know what's happening to their money," said Cuomo, who said he had sent AIG a letter Monday seeking a list of employees who received bonuses.

AIG told the attorney general's office that the checks were issued on Friday, and "their point is there's nothing you can do," Cuomo said.

After weeks of criticism and a weekend of smackdowns, AIG on Sunday finally revealed which firms received billions in federal bailout money, which included several European institutions and two big Wall Street firms, Goldman Sachs (GS, Fortune 500) and Merrill Lynch.

AIG, which has avoided bankruptcy because of taxpayer funding, said it released the list of trading partners or counterparties, along with the sums they received, because the company "recognizes the importance of upholding a high degree of transparency with respect to the use of public funds." AIG said it made the announcement after consulting with the Federal Reserve, which has led the bailout of the company.

The pressure on AIG is likely to only get worse in coming days.

Liddy, who was brought in as CEO in September after the government's first bailout, is expected to testify before a House Financial Services subcommittee on Wednesday.

"Because the federal government has about an 80% stake in the company, AIG must be open and transparent about how it spends taxpayers' money," subcommittee Chairman Rep. Paul Kanjorski, D-Pa., said in a statement. "These counterparties and the recent bonuses, among other topics, will certainly be important issues that my colleagues and I intend to investigate further at the hearing."

AIG spokesman Nicholas Ashooh said Liddy plans to use his appearance on Capitol Hill to explain, among other things, AIG's progress untangling its credit default swaps and its plans to sell companies and securities to pay back the government.

The panel will also hear from Scott Polakoff, acting director of the Office of Thrift Supervision; Joel Ario, the Pennsylvania insurance commissioner; and Rodney Clark, a director in charge of Standard & Poor's insurance ratings.

U.S. store sales showed a smaller-than-expected decline in February after an unexpected surge in January that was bigger than originally reported, according to a government report Thursday.

The Commerce Department said total retail sales fell 0.1% last month, compared with January's revised increase of 1.8%. January's increase was originally reported at 1%.

Economists surveyed by Briefing.com had been expecting a decrease of 0.5% for February.

This second month of better-than-expected sales results prompted one retail expert to say he was "hopeful" that the six-month stretch of monthly sales declines was "moderating" and could reverse before the end of the year.

"We have changed our thinking based on these numbers," said Scott Hoyt, senior director of consumer economics with Moody's Economy.com.

Hoyt said the surprisingly strong sales numbers both in January and in February's core sales, which exclude auto purchases, was due to lower-income consumers having more money in their pockets as a result of government actions.

"There was a significant increase in payments to Social Security, and welfare and food stamp payments in January," said Hoyt, adding that this factor combined with a reduction in tax payments was boosting household budgets.

"There will be another bump to household cash from the government over the course of spring and into summer. That could spur spending again," he said.

But another analyst was less optimistic.

"It [retail sales increase] is highly unlikely to last given the latest downdraft in consumers' confidence and the continued pressure on incomes as payrolls collapse," Ian Shepherson, chief U.S. Economist with High Frequency Economics, wrote in a report Thursday.

"It looks to us like little more than a temporary, though welcome, rebound," he said.

The overall monthly sales number was dragged down by a 4.9% drop in auto sales and a 4.3% decline in sales of auto parts.

Sales excluding autos and auto parts increased 0.7%, compared to a revised 1.6% rise in January. The measure had originally shown a 0.9% increase for January.

Economists had forecast a decrease of 0.1% for February sales, excluding auto purchases, according to Briefing.com.

The government report showed sales rose across retail categories, including a 2.8% gain clothing purchases, a 0.7% increases in furniture sales and a 1.1% increase in purchases at department stores.

Gasoline station sales jumped 3.4%, boosted by rising gas prices at the pump.

The court-appointed lawyer overseeing the assets and operations of Texas billionaire Allen Stanford's companies Friday told 1,000 U.S. employees their jobs have been terminated and said most of the firm's operations will be discontinued.

The cuts represent about 85% of Stanford's U.S. employees, U.S. receiver Ralph Janvey said in a statement.

U.S. regulators have have charged Stanford, his two top aides and three of his companies with a long-running $8 billion Ponzi scheme involving high-yield certificates of deposit.

A small number of U.S. employees, most from the company's Houston headquarters, will be retained to assist with the process of winding down the company's operations, Janvey said.

All terminations are effective March 6, so regular salary and benefits will be discontinued immediately and employees will not receive any severance or bonus, Janvey said.

Exxon Mobil Corp. said Thursday that it would stick to its planned capital spending range for the next five years despite the steep decline in oil prices that has prompted many producers to cut back.

The oil giant said it would spend between $25 billion to $30 billion per year as part of its effort to meet long-term growth in world demand.

"Exxon Mobil's business is strong, and so is our commitment to investing through the business cycle," Chief Executive Officer Rex Tillerson told an analysts meeting.

Exxon's capital spending was about $26 billion in 2008, up about 28% from 2007. The company also spent $32 billion in share buybacks last year.

Exxon set a company and U.S. record for annual profits in 2008, racking up $45.2 billion in earnings in the year that saw oil prices skyrocket to $147 per barrel.

But oil prices have crashed nearly 70% to $45 a barrel since then as the economic downturn has eroded demand in many key regions, including the United States.

Exxon (XOM, Fortune 500) shares were down 2.5% at $64.01 in morning New York Stock Exchange trade.

At Wednesday's close, the stock had slumped nearly 18% so far this year, but was the second-best performer behind McDonald's Corp (MCD, Fortune 500). in the Dow Jones Industrials index over the past six months, with a 17.5% decline in that period.

The stock was also the second-best performer in the Standard & Poor's Energy Index over the last six months and easily outperformed the index, which was down 42% in that period.