Junk bond default rates will continue to climb, pushed higher by the large number of low-rated issues that hit the market a year ago, observers say.

"People point to the 1980s as a time of low credit quality in the high- yield market, but the percentage of outstanding bonds at the low end of the credit spectrum is at an all-time high now," according to Martin Fridson, Merrill Lynch & Co.'s chief high-yield strategist.

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