At first glance the arguments are compelling for owning junk bonds. With the economy enjoying low inflation and good growth, they're an attractive alternative to stocks and command wide spreads to comparable Trea-surys. Of course, the usually double-digit yields are a huge selling point. But many investors are now discovering, to their horror, that the junkyard is a treacherous place. Credit quality is deteriorating, banks are getting tough on terms, especially for companies in violation of their loan covenants, and defaults are on a worrisome increase. Moody's trailing 12-month default rate went from 3.4% in 1998 to a five-year high of 5.5% last year.
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