The Bond Market's Shaky Foundation

One of my current favorites crops up in the financing for the proposed buyout of Alltel(AT Quote), the fifth-largest wireless carrier in the U.S. As part of the $7.7 billion in junk bonds the company will issue to fund its own purchase by Texas Pacific Group and Goldman Sachs(GS Quote), Alltel proposes to sell $3 billion in notes that allow the company to pay quarterly interest in issues of new debt. Bond professionals have dubbed this kind of debt "pay-if-you-can" notes.

I assume the "toggle" notes will sell. Bond buyers aren't nearly as worried as bond professionals yet.

The next time the bond market hiccups, I expect the professionals to head for the door in panic again. They know how rotten the structure is.

The market will finally be in real trouble when meat-and-potatoes bond buyers -- the pension funds, the insurance companies and the bond funds -- join in the rush. Most of the time, individual investors are the last out of a market like this. But it doesn't have to be that way.