Jan. 23 (Bloomberg) -- The risk premium on high-yield, high- risk corporate bonds fell to the lowest in a decade as a drop in oil prices and surging consumer confidence boosts optimism the U.S. economy will grow fast enough to limit defaults.

Investors demand an extra 2.65 percentage points in yield on average to own junk bonds instead of U.S. Treasuries, the smallest gap since 1997, according to data compiled by Merrill Lynch & Co. The spread has narrowed by a percentage point from a year ago and is below its five-year average of 5.17 percentage points, Merrill data show.

The riskiest borrowers are having little trouble raising money. Aramark Corp., the Philadelphia-based operator of concession stands in arenas including New York's Shea Stadium that had its credit ratings cut twice since August, last week sold $1.78 billion of debt at yields that were as much as half a percentage point less than it proposed.

``It's amazing,'' said David Darst, chief investment strategist at Morgan Stanley Global Wealth Management in New York, which oversees $700 billion in assets. ``There's capital out there searching for yield, and that's what has helped keep things low,'' he said, referring to spreads.

Bonds rated below Baa3 by Moody's Investors Service and BBB- by Standard & Poor's are considered high-yield, or junk. The smaller spreads mean companies are paying about $1 million a year less in interest on every $100 million borrowed.

Confidence, Oil

Speculative-grade debt has returned 1.07 percent this year, according to Merrill Lynch, better than the Dow Jones Industrial Index, S&P 500 or the Nasdaq Composite Index.

Government and private data show the economy is accelerating. Last week the Reuters/University of Michigan preliminary index of consumer confidence for January reached the highest in three years, surging to 98 from 91.7.

Crude oil futures touched $49.90 on Jan. 18, the lowest since May 2005, and are own 25 percent from a year ago. Home starts unexpectedly climbed 4.5 percent last month from November, the Commerce Department said last week in Washington.

Investors are willing to pay more for junk bonds because so few companies are missing debt payments. The global default rate was 1.7 percent at the end of 2006, the lowest year-end level since 1996, according to Moody's.

High-yield spreads have hit ``jaw-dropping levels,'' Christopher Garman, head of high-yield strategy at New York-based Merrill Lynch, said in a Jan. 19 report. ``A ferocious bid'' for debt ``continued to take credits tighter.''

No Distress

The percentage of bonds considered in distress fell to a record low of 1.3 percent this month from 1.6 percent in December, S&P said in a report today. A total of 70 companies had bonds trading at distressed levels, down from 97 last month, S&P said. S&P defines distressed bonds as those with yields more than 10 percentage points above Treasuries.

Merrill Lynch's index of distressed bonds has shrunk to a face value of $6.5 billion from $27.4 billion at the end of 2005 and $161 billion in 2002.

Aramark sold $1.28 billion of senior 8.5 percent notes maturing in 2015. It also sold $500 million of senior floating- rate notes due in 2015 that pay interest of 3.50 percentage points more than the three-month London interbank offered rate.

Proceeds will help fund a leveraged buyout of the company by an investor group including Chairman Joseph Neubauer and private equity firm Thomas H. Lee Partners LP. S&P assigned the debt a B- rating. As recently as August, the company had an investment- grade rating of BBB-.

More to Come

About $16 billion of speculative-grade bonds are being marketed for sale, according to data compiled by Bloomberg. They range from the $6 billion of notes New Orleans-based Freeport- McMoRan Copper & Gold Inc. wants to raise so it can buy Phelps Dodge Corp. to the $520 million of bonds the Snoqualmie Indian Tribe is selling to build a casino in Snoqualmie, Washington.

Investor appetite for high-yields bonds remains robust even after a record $184 billion of new issues were sold last year.

``Without a shift on the macro front or material pick-up in new-issue volumes, we believe spreads can trade'' in their current range, JPMorgan Chase & Co.'s Peter Acciavatti, the top- ranked high-yield strategist in Institutional Investor magazine's annual poll, said in a Jan. 19 report.

Spreads may hold until a major event causes them to widen, according to Morgan Stanley's Darst, such as a terrorist attack, bird flu epidemic, ``financial accident'' or global warming.

Darst, the author of ``The Complete Bond Book: A Guide to All Types of Fixed-Income Securities'' (Random House, 1975), recommends his clients wait for spreads to widen before buying high-yield debt. The bonds returned 11.78 percent last year, their best performance since 2003, Merrill Lynch index data show.

`Near the Point'

In March 2005, yield premiums fell as low as 2.71 percentage points, before rocketing to 4.57 percentage points just two months later when the two biggest U.S. automakers, General Motors Corp. and Ford Motor Co., had their credit ratings slashed to high-yield status. The spread reached an all-time low of 2.44 percentage points on Oct. 17, 1997, Merrill Lynch data show.

``We're very near the point where no amount of positive projections on the economy, on the longevity of the recovery or on inflation is going to move these bonds further,'' said Oren Cohen, founding partner at hedge fund Brownstone Asset Management in New York. ``Can things get tighter? It's pretty unlikely.''

The perceived risk of owning high-yield corporate bonds is the lowest in at least three years, according to traders in the market for credit-default swaps.

The Dow Jones CDX North America High Yield Index, which includes credit-default swaps on 100 companies, fell to a record low of 237 last week, data compiled by Credit Suisse Group show.

Credit-default swaps, a type of derivative, have become one of the best gauges of shifts in credit quality. They were conceived to protect bondholders against default and pay the buyer face value in exchange for the securities if a company does default.

Derivatives are financial instruments derived from stocks, bonds, loans, currencies and commodities, or linked to specific events like changes in the weather or interest rates.

To contact the reporter on this story: Caroline Salas in New York at csalas1@bloomberg.net

Last Updated: January 23, 2007 18:04 EST