Nov. 19 (Bloomberg) -- Yields on speculative-grade corporate bonds surpassed 20 percent for the second straight day as a declining economy increased the risk of default.

The average yield on high-yield, high-risk debt rose to 20.81 percent today, from 20.14 percent on Nov. 18, the previous record, according to Merrill Lynch & Co.'s U.S. High Yield Master II index. The level is the highest since Merrill began collecting overall yield data in January 1986.

Junk bonds have lost more than $187 billion in market value since August on speculation the U.S. recession will leave a glut of companies unable to meet their debt payments, Merrill data show. General Motors Corp.'s announcement Nov. 7 that it may run out of operating cash as soon as this year stoked default concerns, said Martin Fridson, chief executive officer of money management firm Fridson Investment Advisors in New York.

``Prices are in a virtual freefall,'' Fridson said. ``Either the market is right and expecting a default rate considerably higher than it was in the Great Depression, or we have such profound dislocations and selling pressures going on that it really is creating extraordinary fundamental value.''

About 72 percent of high-yield issuers have bonds trading at so-called distressed levels, or with yields of at least 10 percentage points more than similar-maturity Treasuries, Merrill data show. That ratio implies a default rate of 18 percent in the next 12 months, according to Fridson.

`Economic Backdrop'

Before this year, the record high for speculative-grade bond yields was 18.3 percent in October 1990, when the yield on 10- year Treasuries was about five percentage points higher than it is now, Fridson said. High-yield, or junk, bonds are those rated below Baa3 by Moody's Investors Service and lower than BBB- by Standard & Poor's.

``People are just worried about the economic backdrop, they're worried about rising defaults,'' said Stephen Antczak, a credit strategist at UBS AG in Stamford, Connecticut.

Moody's increased its forecast for high-yield corporate defaults on Nov. 12 to more than 10 percent in the next 12 months, citing a ``deep and protracted'' recession in the U.S. The credit rating company had predicted a 7.9 percent high-yield default rate a month earlier.

The number of companies at risk of running out of cash reached the highest level since 2002 in October, Moody's said in a Nov. 17 report. As of October, 14 percent of rated companies had an SGL-4 ranking, Moody's lowest level of liquidity rating, up from 12.6 percent in September, the report said. That's the highest percentage since 2002, when Moody's began tracking the data.

Automakers Before Congress

General Motors, Ford Motor Co. and Chrysler LLC, the three largest U.S. automakers, are lobbying Congress today for government aid to stave off bankruptcy.

Detroit-based General Motors, its financing arm GMAC LLC, and GMAC's mortgage unit Residential Capital LLC are three of the four worst performers this month of the 50 biggest issuers in the high-yield market, according to Merrill. GM has lost 29.5 percent, GMAC is down 23 percent and ResCap securities have tumbled 45 percent on average, Merrill data show.

GM's $3 billion of 8.375 percent bonds due in 2033 fell 0.25 cent to 18.75 cents on the dollar at 11:51 a.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The debt yields 44.5 percent, or 40 percentage points more than similar-maturity Treasuries, Trace data show.

Freescale

Freescale Semiconductor Inc. bonds have also lost 27 percent in November, tumbling after Intel Corp. heightened concern the financial crisis is stifling global technology spending by slashing its fourth-quarter sales forecast by about $1 billion. Austin, Texas-based Freescale was taken private in 2006 for $17.6 billion by a group led by Blackstone Group LP.

``The near-term pressures are very challenging,'' said Antczak. ``There's no reason'' relative yields won't continue to rise.

The extra yield, or spread, investors demand to own junk bonds instead of Treasuries rose for the fifth day in a row, increasing 53 basis points yesterday to a record 17.96 percentage points, according to Merrill Lynch. The average price has fallen to 59.5 cents from 85.6 cents on Aug. 31, wiping out more than $187 billion in market value, Merrill data show.

``The risk premiums are just at a staggering level,'' said Fridson. ``The number is not something any of us expected to see,'' he said, referring to the 20 percent yields.

To contact the reporters on this story: Gabrielle Coppola in New York at gcoppola@bloomberg.net; Caroline Salas in New York at csalas1@bloomberg.net

Last Updated: November 19, 2008 18:37 EST