Montreal, Canada.

Since March credit spreads on the most speculative debt have crashed to their lowest levels since the Lehman Brothers bankruptcy in mid-September. High-yield or junk bonds now yield 12.60% compared to a post-Lehman Brothers bankruptcy high of 22.49% in October. And since the stock market lows on March 9 junk bonds have skyrocketed more than 55%.

Junk bonds are the best-performing segment of credit in 2009 showing a dizzy 32% gain, according to the Merrill Lynch Bank of American High-Yield Constrained Index. That easily outpaces the fixed-income competition. Other high-yield indices have surged as much as 55% this year as investors lunge after risk again following a huge 25% crash for the sector in 2008. High-yield mutual fund inflows are also ballooning again since April as investors shove billions into below investment grade bond funds.

This party is probably home to the next crash in global markets. Yes, credit markets have already collapsed since late 2007-2008; but the junk bond market has no business trading at these absurd levels ahead of rising defaults over the next 12-18 months while cornered by an environment of tight credit in the United States and Europe.

Unlike previous economic recessions, when riskier assets like junk bonds offered smart calculated speculations, this cycle is unlike anything we’ve seen since the 1930s. Yet investors continue to underestimate the risks lured by fat yields and the historical crash in values in 2008. Only the shrewd or lucky ones will sell into current market strength; most junk bond investors will hang onto their mutual funds and eventually get cleaned out when the next bear market ravages this sector.

Junk bonds face an unprecedented financing hurdle over the next five years as they need to raise about $950 billion dollars, according to Cantor Fitzgerald.

Just how in the world junk bond issuers will raise all of this money in an ongoing environment of bank cash-hoarding and a reluctance to lend is anyone’s guess. I think it’s safe to forecast that many of these companies won’t be able to secure credit or revolving credit because banks aren’t expanding loan portfolios – especially to below investment grade credits like junk bonds.

If you believe, like I do, that junk bonds are heading into the disaster zone amid a tight credit noose still afflicting below investment grade companies then consider shorting or betting against the sector. The upcoming issue of The Sovereign Individual is recommending how investors can play this theme as part of our TSI Chaos Portfolio strategy, which gained 21.8% in 2008.

Junk bonds are the next “bubble.”

I’m off to Vancouver today ahead of the big Agora conference where I’ll be speaking tomorrow.