Flutter of Activity Bringing Life to High-Yield Markets.

BOND markets have always been segmented, but there is a particularly sharp division going on in the world junk bond scene -- that between troubled telecom corporate IOUs and most other high-yield bonds.

In one of the great building bonanzas of all time, every manner of cable, satellite and broadcasting facility has been built or laid in the last 10 years, in a rush to capture the Niagara of profits supposedly associated with the Internet and global gabbing. Instead, today there are miles of unused cable, and whole enterprises -- such as Iridium LLC, a worldwide cell-phone company with its own fleet of satellites -- have gone bankrupt.

The telecom trashing of the last couple years has hurt overall junk bond fund returns and, to some extent, scared investors away from the whole field. From 1998 through 2000, junk bond funds as a group showed negligible returns, as bond values sank enough to offset interest earnings. Junk bond returns spurted in January, as investors bought bonds on the cheap, but since then have stalled again.

With telecom troubles, reported junk bond default rates have soared, even before the country has tipped into a recession. Obviously, some investors must be wondering what would happen to default rates if the economy sours, and it is looking like it might. But with Wall Street equities edging sideways, return-hungry investors continue to sniff around the edges of high-yield markets, says Jeff Rollert, veteran bond maven and managing director of ALM Advisors LLC in Pasadena, a bond shop.

"Everybody is discovering non-telecom junk bonds," said Rollert. "Suddenly, you are seeing some of the prices moving up."

New issues are selling well -- indeed, while Wall Street can barely budge an initial public offering across the transom, it has sold $40 billion worth of high-yield bonds this year, more than all of last year, according to Boston-based Thomson Financial Securities Data Inc.

Additionally, the bonds of some companies, especially those vulnerable to a takeover, make for interesting plays, said Rollert. For example, bonds of tech giant Xerox Corp. were trading last week for 47 cents per $1 of face value. That's up from 40 cents a couple weeks back, in part because there is a chance that the even bigger tech giant, Palo Alto-based Hewlett Packard Co., might take over Xerox, said Rollert.

Plain old smart shopping always helps. Last year, Rollert took a major position in the bonds of Camp Hill, Pa.-based Rite Aid Inc., the ailing drug store chain. He bought in when the bonds were trading for two bits on the dollar, and now they command more than 80 cents, as it looks more and more like Rite Aid is likely to muddle through bad times. That big Rite Aid bet has resulted in ALM Advisors recently being ranked (in a tie with another shop) as the No .1 junk bond shop in the nation, year to date, by Chicago-based Morningstar Inc.