NEW YORK (Reuters) – U.S. investors came to the Thanksgiving holiday table on Thursday mostly thankful that the week was a short one, or losses could have been larger.

As another round of news and bond auctions from Europe begins next week, traders will watch closely sovereign bond yields that have kept markets on edge.

Yields rose in almost every euro-zone country this week, and Germany failed to find enough bids for a 10-year auction. The S&P 500 reacted by posting a second straight week of declines and its worst week in two months.

Politicians are scrambling to find a way out of a two-year-old sovereign debt crisis in the euro zone and a visit to Washington from top European Union officials, as well as a meeting of euro-zone finance ministers, will provide the market with headlines and possibly add to uncertainty.

With the specter of rising yields, France, Britain, Italy, Belgium and Spain are holding debt sales next week. The direction of bond yields will determine the direction of equity markets.

"Politicians are trying to buy themselves time so austerity measures kick in and impact budgets and deficits and markets become more forgiving and rates come down," said Wasif Latif, vice president of equity investments at the San Antonio, Texas-based USAA Investment Management, which manages about $45 billion.

"The credit market and fixed income are a little bit more in the eye of storm; that's where the issue is rising, so equities are more reactionary," he said. "You may continue to see more of the same."

Investors have worried about rising borrowing costs in many euro-zone nations, but Italy, the third-largest euro zone economy, has grabbed most of the focus. On Friday Rome paid a record 6.5 percent to borrow for six months and almost 8 percent to issue two-year zero coupon bonds.

Many market participants have said that the sharply differentiated risk-on and -off trades that the euro zone crisis has generated has seen equities being sold as an asset class, with little or no difference between strong and week balance sheets and earnings reports. But a wedge has opened at least from a global perspective, as data show stocks of companies with more exposure to Europe are underperforming.

POLITICS TO DRIVE THE WEEK

President Barack Obama will meet on Monday with European Council President Herman van Rompuy and European Commission President Jose Manuel Barroso, and Europe's response to the two-year sovereign debt crisis is expected to top the agenda.

"The only thing that will come out of that is speculation," said Todd Salamone, vice president of research at Schaeffer's Investment Research in Cincinnati, referring to the meeting in Washington.

"It will come down to the U.S. trying to convince European leaders to get something in place to solve this crisis."

Not many hopes are set either on Tuesday's meeting where euro-zone finance ministers are expected to agree on how to further strengthen the region's bailout fund.

On Thursday, European Central Bank President Mario Draghi presents the bank's annual report to the European parliament.

As the latest reminder from markets to politicians that they are running out of time, Belgium's credit rating was downgraded by Standard & Poor's.

IF EUROPE ALLOWS, DATA WILL BE KEY

Some of the most important U.S. economic monthly data will be released next week, but will it be enough to unlink the stock market's behavior and European yields.

New home sales and the S&P/Case-Shiller home prices index will start the week showing if the housing market continues on life support. Data on confidence among consumers, who flooded U.S. stores on Friday as the holiday shopping season started, will be released on Tuesday.

The Institute for Supply Management's manufacturing report is due, with investors not only looking at the U.S. number on Wednesday but also factory readings from Europe and China on Thursday.

By midweek labor data takes over with the private sector employment report from ADP and Challenger's job cuts report, followed Thursday by the weekly jobless claims numbers and topped by Friday's monthly non-farm payrolls report.

"It would be a little bit refreshing to focus on the U.S. data for a change," said Brian Lazorishak, senior quantitative analyst and portfolio manager at Chase Investment Counsel in Charlottesville, Virginia.

He said if European headlines allow it, the focus will be in the labor market where "most people are looking for modest improvement."

(Reporting by Rodrigo Campos; additional reporting by Edward Krudy; Editing by Kenneth Barry)

SINGAPORE (Reuters) – Japanese stocks hit a two-and-a-half-year low and the euro struggled on Thursday after a disappointing German bond sale raised alarm that Europe's ever-worsening sovereign debt crisis is starting to affect even the continent's economic powerhouse.

Stocks elsewhere in Asia failed to sustain a rebound from sharp falls in the previous session, but European shares were expected to eke out small gains.

Financial bookmakers predicted Europe's major indexes in London, Frankfurt, and Paris would open 0.3-0.5 percent higher.

Oil and copper made modest rebounds from a sell-off on Wednesday, when weak data from Europe, the United States and China stoked fears the global economy may be heading for a recession that would dull demand for industrial commodities.

Germany's bond sale on Wednesday had one of the worst results since the launch of the euro, raising concern about the price Berlin may pay for its role as paymaster to a region racked by a crisis that has toppled governments in Greece and Italy.

"If Germany has to pay higher costs for its borrowing, it's obvious it cannot help the entire euro zone," said Makoto Noji, senior strategist at SMBC Nikko Securities in Tokyo.

"If German bond yields keep rising, that could even be a trigger for break-up of the euro."

Tokyo's Nikkei share average fell 1.8 percent to their lowest close since March 2009. Japanese markets were closed for a holiday on Wednesday, when other Asian markets had tumbled.

MSCI's broadest index of Asia Pacific shares outside Japan spent much of the trading day in positive territory before running out of steam.

The earlier gains had been partly driven by expectations that a slowdown in China will prompt Beijing to take monetary policy easing steps such as cutting banks' reserve requirement ratios, allowing them to lend more of their deposits.

"Anticipation of policy loosening in China after the bad flash PMI yesterday is spurring some short-covering," said Linus Yip, strategist with First Shanghai Securities in Hong Kong.

Wall Street shares fell more than 2 percent on Wednesday, and world stocks fell to a six-week low, on data showing slowing factory output in manufacturing titans China and Germany and weak consumer spending in top consumer the United States.

U.S. markets will be closed on Thursday for the Thanksgiving holiday.

GERMAN GLOOM

Germany's bond sale added to the gloom, knocking the euro down 1 percent. Depressed yields in Europe's last safe haven played a part, but analysts warned it also signaled a broader shunning of the region's financial system.

"The other part is that market makers don't want to have a position because of the very distressed nature of financial markets as a whole," said Marc Ostwald, strategist at Monument Securities. "There's certainly a partial element of 'they would rather not have euros' in there."

The single currency tottered to around $1.3360, up a bit less than 0.2 percent on Thursday, having fallen as low as $1.3318 in the previous session.

Against the yen it fell around 0.2 percent to a six-week low just below 103.0.

The inexorably widening euro zone crisis — which has pushed up risk premiums for Spanish, French, Italian and Belgian government bonds — is making it increasingly hard for European banks to access dollar funding in the money markets.

The stresses pushed dollar LIBOR rates, the benchmark for banks lending to each other, up for the 103rd straight session on Wednesday and has driven the cost of swapping euros into dollars to the most expensive levels since the global financial crisis in 2008.

In Asian credit markets, the Asia ex-Japan iTraxx investment grade index saw spreads widen around 10 basis points, reflecting heightened risk aversion.

U.S. crude oil rose 0.3 percent to around $96.60 a barrel, following on from a 2 percent slide on Wednesday, and Brent crude rose 0.6 percent to around $107.60.

London Metal Exchange copper rose 0.2 percent to around $7,250 a tonne, rebounding from a drop of more than 1 percent earlier in the session that had seen it fall to a one-month low around $7,100.

"The demand outlook is deteriorating," said David Thurtell, director of commodity research at Citigroup in Singapore.

"With so much sovereign debt uncertainty and with Western European austerity measures kicking in, copper is likely to trade in the $6,500 to $9,500 range over the period to end-2012."

(Additional reporting by Hideyuki Sano in Tokyo, Ian Chua in Sydney, Manolo Serapio Jr in Singapore and Umesh Desai of IFR in Hong Kong; Editing by Kim Coghill)

NEW YORK – The stock market fell Monday after a jump in Italy’s borrowing costs reminded investors of how much work remains to be done to contain Europe’s debt problems.

The Dow Jones industrial average lost nearly 75 points. Bank stocks fell the most. European markets also fell and the euro weakened against the dollar.

Major indexes closed higher last week as Greece and Italy moved to form new governments and took other decisive steps to get their debt troubles under control. However worrisome signs re-emerged Monday.

The Italian government had to pay 6.29 percent at an auction of five-year bonds, the highest rate since since 1997. Italy paid a much lower rate of 5.32 percent at a similar auction last month. That’s a sign investors are still concerned about Italy’s ability to repay its debts. Stocks tanked last Wednesday after key Italian borrowing rates jumped above 7 percent, a level widely seen as unsustainable.

Also Italy’s biggest bank, Unicredit, reported a $14.4 billion loss.

“The problems these countries are dealing with go well beyond their prime ministers,” said Dan Greenhaus, chief global strategist at the brokerage BTIG. “Italy didn’t get where it is in five minutes. And it’s not going to get out of where it is in five minutes. This is going to take months.”

The Dow fell 74.70 points, or 0.6 percent, to close at 12,078.98. Bank of America Corp. fell 2.6 percent and JPMorgan Chase & Co. fell 2.2 percent, the largest drops among the 30 large companies in the Dow.

The Standard & Poor’s 500 index fell 12.06 points, or 1 percent, to 1,251.79. The Nasdaq composite index fell 21.53, or 0.8 percent, to 2,657.22.

Three stocks fell for every one that rose on the New York Stock Exchange. Volume was very light at 3 billion shares.

Stocks have risen since early October on encouraging signs of progress in containing Europe’s debt crisis, stronger U.S. corporate earnings and better news on the U.S. economy. The S&P 500 has soared 13.7 percent since hitting its low for the year on Oct. 3.

That surge has drawn big investors back into the stock market and opened the door to a long line of companies waiting to go public. The flow of money from institutions into U.S. stock funds hit $7.3 billion last week, the third largest tally this year, according to fund tracker EPFR Global.

Angie’s List, a customer review website, Delphi Automotive and seven other companies are scheduled to go public this week. If they all wind up going through, it would be the biggest week for IPOs in four years, according to Renaissance Capital, an IPO advisory firm.

In corporate news, the airline Emirates placed an order for 50 Boeing 777s, one of the largest orders ever placed with the aircraft maker. Boeing Co. also picked up a new customer, Oman Air, which ordered six 787s. Boeing rose 1.5 percent.

J.C. Penney Co. fell 2.8 percent after reporting a quarterly loss. The department store operator said its results were weighed down by restructuring costs. The company also lowered its earnings outlook for the rest of the year.

Lowe’s Cos. rose 1.7 percent after the country’s second-largest home-improvement retailer reported revenue and earnings that beat analysts’ expectations.

The Dow has made gains in six of the past seven weeks, and is still up 1 percent for the month. The S&P 500 and the Nasdaq are slightly lower.

NEW YORK (Reuters) – Stocks fell on Monday as rising bond yields in Italy and other euro-zone countries reminded investors that despite changes in governments, the region's debt crisis could still spin out of control.

Banks posted the largest losses, but overall volume was unusually weak. The KBW bank index dropped 2.5 percent, with Bank of New York Mellon down more than 4 percent.

The S&P 500 found strong resistance after closing on Friday near its 200-day moving average and close to the top of a trading range the index has held for three months.

Initial relief over the appointment of a technocrat to head the new government in Italy after the resignation of Silvio Berlusconi gave way to worries that unpopular austerity measures will not be enough to fix the country's finances. For details see.

Benchmark yields in Italy, France and Spain edged higher from the end of last week and closed near session highs. Rising bond yields are being watched carefully because every rise in interest rates threatens the ability of Italy and other countries to finance themselves.

"That sign of a reversal of what had been a more favorable trend in Europe is what the (equities) market worried about today," said Jeff Kleintop, chief market strategist at LPL Financial in Boston.

"That has raised worries that European problems are not that much behind us."

Stocks have lately focused on headlines from Europe as traders react to the escalating sovereign debt crisis in the euro zone. Italian benchmark bond yields rose above 7 percent last week, a level that forced countries with a lower debt burden to seek bailouts. With debt of more than 2 trillion euros, Italy is considered too big to bail out.

Yields on 10-year Italian debt rose to 6.76 percent on Monday.

The Dow Jones industrial average dropped 74.70 points, or 0.61 percent, at 12,078.98. The Standard & Poor's 500 Index fell 12.07 points, or 0.96 percent, at 1,251.78. The Nasdaq Composite Index lost 21.53 points, or 0.80 percent, at 2,657.22.

At 5.5 billion shares traded on the New York Stock Exchange, NYSE Amex and Nasdaq, the third-lowest number so far this year and down more than 30 percent from the year's daily average of just over 8 billion.

Declining stocks outnumbered advancing ones on the NYSE by a ratio of 16 to 5, while on the Nasdaq, about three stocks fell for every one that rose.

Stocks continued to track the euro, which fell more than 1 percent against the dollar.

Adding to the gloom in the region, industrial production in the euro zone fell in September, the most since early 2009. Output at factories in the 17-nation group declined 2 percent for the month.

LPL Financial's Kleintop said the data mostly confirmed the market's anticipation of a mild recession in the euro zone.

Italy's debt in the credit default swap market rose to a record at the close of 569 basis points, up from 525 basis points on Friday, according to data provider Markit. This means it would cost 569,000 euros per year to insure 10 million euros of Italian debt for five years.

French and Spanish CDs costs also rose to record highs, according to Markit.

Limiting losses on the Dow, Boeing Co shares rose 1.5 percent to $67.94 after the U.S. planemaker announced a large order.

Shares of Bank of America Corp dropped 2.6 percent to $6.05 as the lender plans to sell most of its remaining stake in China Construction Bank Corp for $6.6 billion in a move to raise capital.

Bank of New York Mellon Corp fell 4.5 percent to $20.55 after it said it expects to take a hit against earnings of up to $100 million in the fourth quarter.

(Reporting by Rodrigo Campos; Editing by Kenneth Barry)

HIGH RATE: Days after getting a new prime minister, Italy had to pay the highest rate at a five-year bond auction since 1997. That’s a sign investors are still worried about Italy’s ability to pay its debts.

WEAK EURO: The euro fell against the dollar as investors became nervous about the European debt crisis again. The euro fell about 1 percent against the dollar. European stock indexes also fell. Germany’s DAX lost 1.2 percent.

THE DOW: The Dow Jones industrial average fell nearly 75 points to close at 12,079. The Dow has made gains in six of the past seven weeks, and is still up 1 percent for the month.

BOSTON – Investors sought refuge from the market’s volatility in August, withdrawing money from stock mutual funds and bond funds alike. The retreat from stock funds was unusually heavy for the third consecutive month, marking a renewed aversion to risk.

A net $21.4 billion was withdrawn from U.S. stock mutual funds in August, and $10.8 billion from bond funds, industry consultant Strategic Insight said Wednesday.

Last month’s exit from stock funds followed net withdrawals of more than $23 billion in July and $17 billion in June. The three-month trend marks an about-face from the start of the year, when investors consistently deposited more than they withdrew. Now, the year-to-date stock fund flow is negative, with $21.2 billion in net withdrawals.

Investors have turned away from stocks as the Standard & Poor’s 500 index has declined four months in a row, capped by a 5.4 percent drop in August. The month was marked by extreme declines and rebounds, and a U.S. credit rating downgrade by S&P following a last-minute congressional deal to raise the nation’s debt ceiling.

Worries about the U.S. economic recovery and Europe’s debt crisis have added to investors’ fears, said Avi Nachmany, research director with New York-based Strategic Insight. The company said fund investors were “clearly shaken by a dramatic month.”

Other details of how investors moved their money in August:

• Foreign stock funds: Investors withdrew a net $1.4 billion from funds that buy foreign stocks. Flows into this category have been negative for two months in a row, but remain positive year-to-date, with nearly $44 billion in net deposits.

• Bond funds: Investors typically are attracted to bonds when stock prices tumble. That was the case in July, when bond funds attracted $8 billion in net deposits.

But last month, investors in taxable bond funds — a category that includes corporate bonds — withdrew a net $9.7 billion. Strategic Insight noted big withdrawals out of floating-rate and high-yield bond funds. Both categories hold bonds that typically earn high rates of return, with greater risk of volatility. About $1.1 billion was withdrawn from municipal bond funds, which buy the debt of state and local governments.

However, Nachmany said demand for bond funds should rebound, as they began to attract new money toward the end of August. He also noted that bonds will continue to look attractive given expectations of continued stock volatility, and the Federal Reserve’s statement last month that it plans to keep interest rates very low until at least mid-2013, assuming the economy remains weak. Bond yields look attractive compared with the near-zero returns that bank accounts and money-market mutual funds now offer.

• Money-market funds: A net $69 billion was deposited into these funds, designed to be safe harbors where investors can temporarily park cash and quickly access it when needed. That proved a strong draw in August, in contrast with July. In that month, investors withdrew a net $113 billion, due to fears that Congress might fail to reach an agreement to lift the government’s debt ceiling. Investors were scared off because nearly half of the $2.6 trillion that money funds hold is invested in Treasury bonds.

• Exchange-traded funds: Investors deposited a net $1 billion into ETFs, which bundle together investments in a particular market index. Unlike mutual funds, they can be traded during daily sessions just like stocks. Through the first eight months of the year, net deposits into ETFs total $89 billion, a pace that could lead to a fifth straight year with more than $100 billion of inflows into ETFs, Strategic Insight said.

LONDON – A European Central Bank pledge to buy up Italian and Spanish bonds slashed the two countries’ borrowing costs but most global stock markets sank again Monday following the downgrade of U.S. debt by Standard & Poor’s.

European markets lost early momentum and most were trading sharply lower amid mounting fears over the opening of U.S. markets, when traders will have their first chance to respond to the S&P’s decision to lower its triple A rating for the U.S.

Investors remain worried about the state of the world economy and policymakers’ ability to deal with the European debt crisis, said Neil MacKinnon, global macro strategist at VTB Capital.

“Investors are concerned about a rising risk of global recession, credit downgrades especially now in the eurozone, such as France, the threat of a major bank bust and a global liquidity trap as investors stay in cash,” MacKinnon said.

Those concerns trumped any relief European markets got from the sharp fall in Italian and Spanish bond yields after the European Central Bank said it would buy the two countries’ bonds in order to help them avoid devastating defaults. The yield on Italy’s ten-year bonds fell 0.66 percentage point to 5.32 percent while Spain’s tumbled 0.82 percentage point to 5.22 percent.

In Europe, Britain’s FTSE 100 index of leading British shares was down 1.7 percent at 5,160 while France’s CAC-40 fell 2 percent to 3,214. Germany’s DAX was 2.3 percent lower at 6,096.

Sentiment in Europe has not been helped at all by the expected sell-off at the U.S. open — Dow futures were down 2.1 percent at 11,167 while the broader Standard & Poor’s 500 futures fell 2.4 percent to 1,168.

Policymakers around the world, many on holiday, are trying to come up with a strategy to shore up market worries over the global economy and the levels of debt in the U.S. and Europe.

Late Sunday, Europe’s central bank said it would “actively implement” its bond-buying program to calm investor concerns that Italy and Spain won’t be able to pay their debts. Last week, worries over the two countries’ ability to keep tapping bond markets contributed to the turmoil in global markets, which saw around $1.5 trillion wiped off share prices.

Seeking to avert panic spreading across financial markets, the finance ministers and central bankers of the Group of 20 industrial and developing world also issued a joint statement Monday saying they were committed to taking all necessary measures to support financial stability and growth.

“We will remain in close contact throughout the coming weeks and cooperate as appropriate, ready to take action to ensure financial stability and liquidity in financial markets,” they said.

So far, the S&P downgrade doesn’t seem to be having too much of an impact on U.S. government bonds, known as Treasuries. The worry has been that the downgrade would prompt investors to demand more, but the yield on ten-year Treasuries has actually fallen.

“Early market reactions suggest that the treasury market will remain well supported,” said Jane Foley, an analyst at Rabobank International. “Even though there may be no sharp sell-off in treasuries this week, S&P’s decision should at least provide a signal to the U.S. government that it may be foolhardy to continue to take its creditors for granted indefinitely.”

Earlier in Asia, the repercussions of S&P’s downgrade weighed on stock markets.

Among the major markets, Japan’s Nikkei 225 stock average closed down 2.2 percent 9,097.56, while Hong Kong’s Hang Seng fell the same rate to 20,490.50. South Korea’s Kospi ended 3.8 percent lower as did China’s main exchange in Shanghai.

In the currency markets, the euro was flat at $1.4308 while the dollar was down 0.8 percent at 77.69 yen.

Fears over the global economy are having a major impact on oil markets, with the main New York rate down another $2.87 to $84.01 a barrel.

___

Pamela Sampson in Bangkok contributed to this report.

Stocks are mostly lower and bond yields are at a new low for the year after two reports dimmed hopes for the job market and the U.S. economy.

The government says more people applied for unemployment benefits last week, the first increase in three weeks. A separate report says the economy grew at a sluggish 1.8 percent in the January-March quarter. Surging gasoline prices and cutbacks in government spending offset strong corporate earnings.

The yield on the 10-year Treasury note went as low as 3.07 percent, its lowest of the year.

The Dow Jones industrial average was down 33 points, or 0.3 percent, at 12,361 in midday trading. The S&P 500 fell 2, or 0.1 percent, at 1,319. The Nasdaq rose 4, or 0.1 percent, to 2,764.

(Reuters) – Settlement agreements being hammered out by securities regulators and securities firms accused of fraud in mortgage bond deals are likely to include civil charges against at least one person connected to each deal, the Wall Street Journal said, citing people familiar with the matter.

SEC officials are pushing hard as part of their ongoing probe of collateralized debt obligations and other mortgage related products developed by Wall Street to bring charges against individuals, such as executives involved in selling the deals or outsiders who managed the assets, the Journal said.

The agency may also file civil charges against hedge fund managers who helped structure certain mortgage bond deals but then bet against them, the paper said.

The SEC could not immediately be reached for comment outside regular U.S. business hours.

(Reporting by Sakthi Prasad in Bangalore; Editing by Muralikumar Anantharaman)

NEW YORK – Here’s a markets riddle for you: What has jumped in value more than its biggest fans expected and withstood worries like slowing U.S. growth, European debt woes and even the specter of the U.S. losing its top credit rating?

No, it’s not the stock market.

Stumped? It’s junk bonds, a sort of IOU from risky companies thought most likely to not pay back their debt.

Junk has gained 55 percent the past two years, 5 percentage points more than stocks. That’s good for the many brave investors who’ve bought junk bonds. And good for the economy, too. The hot market for junk means companies that once seemed close to bankruptcy can sell these bonds with ease and use the proceeds to run their businesses.

“Companies struggling during the recession have been able to borrow, and that’s given them time and that’s good,” says George Cipolloni, co-manager of Berwyn Income, a mutual fund that holds junk.

The latest sign of this economic elixir at work came Wednesday. While stocks were in a two-day decline, research firm Dealogic published a report showing a record amount of junk bonds has been sold so far this year — $158 billion, nearly double what was sold during the same period in 2007, when the economy was still booming.

But this rally is not without its critics. Junk is up partly because companies are more likely to pay back their bonds and other debts now that the Great Recession is over. But Federal Reserve Chairman Ben Bernanke has also played a role in rising junk prices. That worries investors who think the Fed has a habit of inflating bubbles.

The Fed’s policy of setting benchmark interest rates at zero and buying government securities has frustrated investors who are getting miserly interest payments on those and other conservative assets. That led many to rush into risky investments. To some extent, that’s exactly what the Fed wanted. The hoped-for result is that money will flow more freely to companies and that investors will feel richer — and that both will spend more. Bernanke’s efforts were mostly designed to push investors into stocks after many pulled money out of stocks during the financial crisis. They’ve fled into all sorts of assets including tradable bank loans, heating oil futures, carbon-emission credits and, yes, junk bonds.

A revived economy may justify the higher assets prices on junk that Fed policy has facilitated. But critics of the Fed note that such easy-money policies have helped lead to two stock bubbles in a decade, a credit market bubble and a housing bubble — all of which burst, socking investors with hundreds of billions in dollars in losses. When junk bonds imploded in 2008, for example, investors in mutual funds holding them lost 26 percent, according to Morningstar. Buyers were so scared that bond yields, which move in the opposite direction from their price, spiked to over 20 percent.

The big appeal of junk now is that safer assets are so unappealing. Holders of five-year Treasurys get 2 percent annually for their money now. Put cash in five-year certificates of deposits instead and you might get 2.6 percent. Junk bonds? They’ll give you 6.7 percent, according to Barclays Capital.

That sounds great, but in reality, junk bond yields are near record lows and they’re down 1.75 percentage points in just a year.

“Companies are more healthy now, but I’m not getting paid as much,” says Andrew Smock, co-chief investment officer at Merganser Capital, a money manager that has been selling junk for several months as investors have piled into the market. “It’s junk, it’s risky. I can’t get excited.”

Referred to in polite company as high-yield bonds, junk is issued by companies that rating agencies like Standard & Poor’s consider less likely to pay back their lenders. They have too much debt, too little cash or too few prospects for the kind of growth that would generate cash — or all three.

Of companies rated junk, 2.9 percent have defaulted over the past year, which means they mostly failed to pay interest or paid it late, according to Moody’s Investors Services. That’s better than the previous year, when 11 percent stiffed their investors. Should the recovery lose steam, defaults could rise sharply and investor returns plummet.

And if the recovery continues apace instead? Danger lurks there, too. Fast economic growth could lead to inflation. Higher prices eat into the purchasing power of a bond’s principal when it’s returned upon maturity and on its interest payments. Some investors in junk and other fixed income securities will sell at the first hint of inflation, which could mean losses for those still invested in junk.

So far, investors have decided to put off worrying about the risks of junk.

Consider the reception they gave a recent offering from Ford Motor Credit. On April 28, the finance arm of the car maker sold $1.25 billion worth of bonds offering 5 percent annually over seven years. Ford was thought by many investors to be on the brink of bankruptcy just three years ago. And yet demand among investors was so great, Ford had enough buyers to sell its bonds nearly three times over, says Merganser’s Smock, who reviewed the deal but decided to pass it up.

The bullish argument is that Ford never collapsed and it’s profitable now and selling more cars. But is 5 percent enough of a return in exchange for the risk that the company or the economy won’t stumble again? Not too long ago, super-safe Treasury notes of similar maturity to the Ford bonds were yielding the same 5 percent. Treasury notes get an Aaa rating from Moody’s (for now; Standard & Poor’s says the U.S. could lose its top rating because of concerns about the federal budget). The Ford bonds just sold are provisionally rated Ba2, or 11 steps lower. Historically, 8 percent of Ba-rated bonds have defaulted within five years.

“Ford isn’t necessarily the poster child of junk, but you’re not being paid enough for the risk,” Smock says. He adds that while he doesn’t consider the junk market a bubble, it is “overbought.”

Count Cipolloni, the money manager who praises junk’s impact on the economy, among the skeptics, too. “People are more desperate for yield than they are fearful of losing principal,” he says, adding that he has been selling junk recently after buying it during the credit crisis. “They’re overlooking the risk.”