Serious Money: Michael Milken, the one-time king of junk bonds, turned 60 in July and undoubtedly he gains some satisfaction on observing that the market he developed almost single-handedly in the 1980s has come of age.

The junk bond market had grown from less than $10 billion (€7.87 billion) in the late 1970s to almost $200 billion a decade later. Claims that junk was dead in the early 1990s proved premature and, if current trends persist, the market will exceed $1 trillion in the near future. Junk, repackaged as high-yield, is now an integral part of fixed-income portfolios in the US and has enjoyed increasing acceptance in Europe in recent times.

However, while the risk and return characteristics of high-yield bonds are certainly appealing, now may not be the time to invest in junk.

Milken did not invent the junk bond but he levelled the playing field by opening the bond market to new and emerging firms that were rated below investment grade by the rating agencies. Before Milken the market consisted of "fallen angels", former investment grade companies that had fallen on hard times, but under his tutelage "rising stars" or young emerging firms came to dominate in the early 1980s.

The list of firms he helped fund is impressive, including MCI, Ted Turner's CNN as well as McCaw Cellular.

Undoubtedly, the junk bond played a pivotal role in the renaissance of corporate America in the 1980s and beyond. However, success attracted poor imitators and inevitably the market soured, so much so that the New York Times declared, "the need for a junk bond market is far less obvious".

The junk bond king was sentenced to 10 years in prison, ironically on the same day Margaret Thatcher was toppled from power, but his punishment bore no relationship to his alleged crimes.

In reality, Milken was punished for his success but thankfully his legacy lives on in the new industries he financed from cable television to mobile telephony.

High-yield bonds are back in the spotlight given the excellent returns of recent years. Junk has outpaced US stocks in four of the past five years, leading to outperformance of almost eight percentage points a year. Fundamentals appear to be excellent with default rates below 2 per cent versus a long-term average of almost 5 per cent. Corporate balance sheets appear to be in excellent shape and, not surprisingly, the additional yield offered by junk relative to their investment-grade brethren is well below average. But are investors being compensated for the additional risk?

The frequency of corporate failure is close to record lows but all of the indicators point one way - defaults will increase. Most importantly, the US economy is facing a slowdown, though financial markets believe the Federal Reserve will get it right and glide the economy to a more sustainable growth path.

Unfortunately, history does not side with the optimists. Indeed, Alan Greenspan, considered by many to be the best central banker of our times, failed twice at three attempts.

Perhaps the Federal Reserve will get it right but current trends are cause for concern. Most of the factors that precipitated market busts are prevalent today.

First and foremost, the quality of high-yield issuance has deteriorated. The number of dubious credits that have accessed the market has exploded and a surge in defaults is inevitable.

Note also, as outlined in a previous article, corporate profits are at record levels as a percentage of gross domestic product (GDP). Business cannot command an increasing share of GDP at the expense of labour indefinitely.

Current data confirms this view and consequently, the outlook for corporate profit growth is not great. Additionally, as pension deficits exert greater pressure on cash flows, defaults will rise.

A final point to make is the increasing appetite for second-lien debt.

Such debt is similar to a second mortgage - the issuer of the first mortgage has a priority claim on the borrower's assets, followed by the second mortgage provider. The increase in priority claims means recovery rates for high-yield investors in the event of default should trend lower.

There should be no doubt that junk is a respectable asset class. Most of the degrading commentary that followed the market collapse of the 1990s is untrue.

The risk and return characteristics are excellent. Nevertheless, timing is everything and investors would be well advised to think quality and not junk for now.