GMAC's junk-rated bonds rallied last month when the government agreed to pump $6B into the company. But that rally also lifted the broader junk bond market.
Triple C bonds, the riskiest in fixed-income, rose 5.5% in December, while the broad speculative-grade market jumped 4.5% in its first sustained rally since Q1 2008. Liquidity is improving and people are slowly starting to take risks again, prompted in part by extremely low yields on Treasurys.
Refinancing remains a risk and Wall Street expects the default rate to rise to 10% by the end of the year from 3% now, but Christopher Towle, partner and portfolio manager at Lord Abbett, says "the market is so oversold... that it's already discounted" by investors.
Towle favors electricity-generation companies, yielding around 12.4% now (down from 16% over a month ago). He also likes health care firms, including Community Health Systems (NYSE:CYH), and select telecommunications bonds (like those of Cincinnati Bell (NYSE:CBB) and Qwest (NYSE:Q)).