'Contagion' is here...

'Contagion' is here... The biggest risk today... Credit worries are 'rippling across the high-yield market'... New signs of trouble...

The biggest risk to your money today is most likely not what's happening in the high-yield – or "junk" – bond market...

If you've been following our recent warnings, you've already sold any mutual funds or exchange-traded funds (ETFs) that hold these bonds. (If you haven't, drop everything and read this now.)

Instead, the greater risk is that the troubles in junk bonds will spread to other markets. Porter explained why in the September 25 Digest...

And according to recent reports, the "contagion" is already spreading...

As Porter has explained, the recent turmoil started in the energy sector.

In short, much of the Federal Reserve's "easy money" since the financial crisis has flowed into the oil and gas industry.

This flood of cheap money and credit – combined with new technological advances in horizontal drilling and hydraulic fracturing, or "fracking" – led to a massive boom in oil production.

But like we saw in the housing bubble – where low interest rates encouraged folks to take on huge mortgages they couldn't actually afford – it also encouraged oil companies to take on far more debt than they should have.

Like Porter warned months in advance, this was a recipe for disaster...

Soaring oil production would eventually cause oil prices to crash. Crashing oil prices would cause oil companies' revenues to plummet. And plummeting revenues would mean it would only be a matter of time before a huge number of energy companies would have trouble servicing these debts.

Of course, that's exactly what happened. As we've discussed, many of these companies are already in serious trouble. Sooner or later, many are likely to default... and this financial "stress" is behind much of the recent turmoil in the junk-bond market.

But these problems are already spreading other areas, just as Porter predicted...

According to an article in the Wall Street Journal yesterday, credit worries that were originally restricted to the energy sector are now "rippling across the high-yield bond market." From the article...

More important, there are signs that these problems are already moving beyond the junk-bond market as well...

In a separate article last night, the Journal reported that giant investment banks Goldman Sachs and JPMorgan Chase are struggling to sell loans backing the leveraged buyout of online clothing retailer FullBeauty Brands. The banks made the loans to private-equity firm Apax Partners to finance the deal in August.

While the details of the deal aren't important, the difficulty with selling these loans to investors is...

Like junk bonds, these loans are considered "high yield." But unlike junk bonds, these loans are "secured," or backed by collateral.

In the event of a default, investors in the secured loan are paid first... and have the right to liquidate the collateral to recover their investment.

In other words, the problems are now moving into "less risky" debt. As Marty Fridson told the Journal, "It's a natural progression... Unsecured bonds feel the pain first, then it moves to loans." And Fridson knows what he's talking about.

If that name sounds familiar, it should... Fridson is the world's leading expert on the credit cycle in corporate bonds. And like us, he's concerned... Fridson predicts nearly $1.6 trillion in defaults over the next four years.

While bond markets have "bounced" from their recent lows over the past few days along with stocks, the trend is still down. And we believe there are likely further declines ahead...