Bonds' Carefree Days Get a Bit Cloudy

The bond market's vault doors were flung wide open to U.S. corporations in 2006, but look for Wall Street banks to be a little more stingy in 2007.

U.S. companies sold more than $813 billion in bonds in 2006, the biggest year ever for corporate borrowing, says Thomson Financial. The market for junk bonds was particularly hot, with the dollar value of high-yield bonds sold to investors rising 53% from the prior year to $127 billion.

A perfect climate of low interest rates, relaxed lending standards and a tidal wave of leveraged buyouts all came together to make 2006 a whale of a year for Bank of America(BAC Quote), Citigroup(C Quote), JPMorgan Chase(JPM Quote), Merrill Lynch(MER Quote), Morgan Stanley(MS Quote) and Wall Street's other fee-hungry bond underwriters.

In 2006, Wall Street bankers were all too eager to please their corporate customers and feed the borrowing frenzy, which also went to pay for stock buybacks and special dividends. Banks and brokers raked in $4.97 billion in bond underwriting fees, a 46% gain over 2005 -- a revenue bonanza that helped fuel a record year of earnings on Wall Street, reports Dealogic, a market data service.

And on top of all those bonds, commercial lenders arranged $500 billion in so-called leveraged loans, high-yielding bank debt that buyout firms also use to finance deals.

But the borrowing spree and days of easy money on Wall Street may come to an end in 2007, as banks begin to worry about the impact of a slowing economy on the ability of companies to make their debt payments. The market for bonds backed by mortgages to consumers with shaky credit histories is showing signs of cracking, as borrower defaults are on the rise.