Mark Kiesel, at Pimco's Pacific Investment Management Company says it's best to sell your junk bonds now. Why is he saying this? The key factor is that economic growth is not there. Kiesel looks for only 1-2% growth in GDP next year.

All of this talk about "green shoots" simply is not materializing. Kiesel says the "green shoots" are turning to weeds. He further said that credit is not re circulating. Business financing costs range from 10-12%, making it difficult for some businesses to stay afloat.

There are strange goings on in the markets these days. The latest catch 22 is the rally in junk bonds. Bloomberg reports that "The lowest rated companies that may not be able to afford avoiding bankruptcy and exchanging or buying back debt at the lowest prices on record." That is pushing the prices of junk bonds up in the biggest rally ever. The flip side is that this practice is the higher prices are crowding out some of the neediest companies

Here are some examples:

• The Blackstone Group LP (NYSE: BX) owns Freescale Semiconductor Inc. In March, Blackstone wiped away $1.9 billion of Freescale's debt by offering investors 32 cents on the dollar in loans. Since then the securities have tripled to 54.1 cents on the dollar. Now, the chip maker still has $7.5 billion of debt and would need to do it at much higher prices.

A committee of General Motors (NYSE: GM) bondholders hoping that the United States government will continue to bailout the company without wiping them out is pleading for mercy: "GM bondholders are not a collection of Wall Street banks," the committee wrote. "Many of these bonds are owned by average citizens, who purchased them to support their own retirement and college expenses and other critical needs."

DealBook reports that junk bond king Mike Milken is trying to defend securitization. Despite pleading guilty to six felony counts of securities fraud and conspiracy, paying $600 million in fines and spending 22 months behind bars, Milken is still quite highly regarded. But the defense he offers of securitization is pretty thin gruel.

Milken and I both studied under the same professor at Wharton -- making me feel a bit like Forrest Gump. After he taught Milken, the management professor told me that he concluded Milken would either make enormous amounts of money or land in jail. The professor's prediction proved correct -- except that Milken did both.

Milken's defense appears to be that securitization and surgery are alike. DealBook quotes Milken as saying that criticizing securitization - the slicing and dicing of debt that he helped popularize - is "like condemning scalpels because a few unqualified surgeons have injured patients."

It seems strange to invest in a security that is called "junk." But it's a huge business that can be quite lucrative. Hey, it made Mike Milken a billionaire. What's more, junk bonds have become a key financing mechanism for growth companies as well as leveraged buyouts.

The market for junk bonds has been particularly strong over the past few years, with a large spread between junk and high-quality securities was. That is, until the "credit crunch" hit Wall Street in August.

Now, Edward Altman – a professor and a finance guru – is predicting some grim news for junk bonds for this year. Basically, he thinks the default rate will spike to 4.64%, according to a piece in the Wall Street Journal [subscription required]. Keep in mind that the default rate was a paltry 0.51% in 2007.

A key driver for buyouts has been the seemingly endless liquidity from the junk bond market. And with default rates at rock-bottom, why not do a deal?

Well, there are some signs that junk bond liquidity may be tightening up a bit. One of Dobson Communications' (NASDAQ: DCEL) divisions, American Cellular, had to withdraw its $425 million junk bond offering. This is according to a report from Reuters.

Why? Apparently the pricing is not so good because of the recent volatility in the financial markets.

This does not mean that American Cellular will not be able to raise money. Instead, it will now go straight to the loan market.

It's too early to tell if this is a blip or trend. But for the most part, junk bond investors are showing that they are starting to worry about risk.

And that should certainly worry private equity players who need cheap cash.

Tom Taulli is the author of various books, including the Complete M&A Handbook and the EDGAR-Online Guide to Decoding Financial Statements.

Generally, equity investors tend to be optimistic while bond investors are the opposite. Why? Well, bond investors want to make sure they preserve their capital and, as a result, are particularly sensitive to emerging problems.

According to a recent piece on Bloomberg.com, there is a divergence between the two markets with respect to the big investment banks: Goldman (NYSE: GS), Merrill (NYSE: MER) and Morgan Stanley (NYSE: MS).

If you look at their credit default swaps, which provide protection against payment problems with bonds, the trading is near junk bond levels. As the Bloomberg report says, " Prices for credit-default swaps linked to the bonds of the New York investment banks this week traded at levels that equate to debt ratings of Baa2, according to Moody's Investors Service. For Goldman, Morgan Stanley and Merrill that's five levels below the actual Aa3 rating on their senior unsecured notes and two steps above non-investment grade, or junk."

Why the doom and gloom? It's hard to say.

But one theory is the implosion of the subprime market. The big investment banks have made lots of money from this segment. Moreover, the recent problems in global financial markets certainly don't help. After all, a big source of growth for the big investment banks has been in emerging markets.

This is not to say that the big investment banks will come undone. However, after a big run-up in their stock prices, we may see more bearishness.

Tom Taulli is the author of various books, including the Complete M&A Handbook and the EDGAR-Online Guide to Decoding Financial Statements.

Wilbur L. Ross has spent his career managing complex bankruptcies and restructurings. And he's pretty good at it -- he is now a billionaire. In fact, he's so good that Goldman Sachs recently partnered with him to start a fund to capitalize on prospective financial implosions.

Well, according to a report from Reuters, Ross thinks that 2007 will be a tough year, especially for companies that have loaded-up on debt for buyouts. He sees many more bankruptcies and as a result expects to see a 7% default rate on junk bonds. That would be an increase of 700%.

He also mentioned that the holders of junk bond debt have changed. There are now many hedge funds that have played in this market. If a leveraged company has problems, will a hedge fund really be interested in working with management? Or will the hedge fund use tough tactics to salvage the investment?

Another concern of Ross: he believes that in buyout deals, the multiples are simply too high.

In other words, if things go wrong, things are likely to unwind quickly. Of course, for Ross, this will mean more good times ahead.

Tom Taulli is the author of various books, including the Complete M&A Handbook and operates InvestorOffering.com.

HCA, which is the biggest hospital company in the US, is going through the leverage buyout process. This means borrowing huge amounts of money – such as from banks and bond investors.

Well, it looks like there is little trouble raising the capital. Today, HCA was able to issue $5.7 billion in high-yield bonds.

Actually, keep in mind that "high-yield" has another name – ie, "junk bonds." These are bonds that have a relatively higher risk of default. In particular, the bonds have terms of 8 to 10 years. And, what do investors get? The yields range from 9.125% to 9.25%.

That's certainly better than what investors can get from the Treasury market.

Yet, there is definitely some risk. If HCA has trouble, so will the bonds. But, hey, that's for another day.

Something else: with the ease of the HCA financing shows there is lots of liquidity for buyout bonds. Actually, the next mega deal to get financing is Freescale, which will involve $9.4 billion in bonds.

Tom Taulli is the author of various books, including the Complete M&A Handbook and the EDGAR-Online Guide to Financial Statemet. He also has a blog at www.taulli.com.