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You're hearing it more often these days: take a look at junk.

With the stock market in the tank for more than two years, investors have increasingly turned their attention to fixed income investments such as bonds; the Pimco Total Return Fund, managed by bond guru Bill Gross, last month became the largest mutual fund in the country.

But the surge in the popularity of high-quality bonds over the past two years now has many observers wondering if their party is over, as U.S. Treasury yields approach historic lows. At the same time, stocks remain volatile and intimidating to many investors, recent surges notwithstanding.

So if stocks still look scary and government bonds are hitting a ceiling, where does money go? An increasing number of experts are looking at a sector once viewed as an investment sewer: high-yield corporate bonds.

"In my judgment junk bonds are the most attractive part of the bond market," said Charles Lieberman, chief investment officer for Advisors Financial Center.

Ratings companies such as Standard & Poor's, Moody's and Fitch characterize them as "speculative grade" bonds, but almost everyone calls them "junk" for a good reason: many of their issuers go out of business. Junk bonds offer high yields because their companies that have poor credit. That's why almost no one believes that individual investors should buy standalone junk bonds.

But many experts believe that junk bonds' high interest rates offer the best risk-reward return available these days. Yes, the companies are risky, but they're also offering the highest payoff.

"You are getting paid for the credit risk you take in the high-yield market," FPA New Income Fund manager Thomas Atteberry said on the Oct. 11 broadcast of Wall $treet Week with FORTUNE.

Even longtime value investors have been talking about junk. Warren Buffett earlier this year bought bonds of Level Three, one of many troubled communications firms. And the fund of Jean-Marie Eveillard - normally known for buying gold and stocks like McDonald's - picked up the high-yield bonds of Lucent.

Low interest rates and low returns on higher quality bonds are driving money managers further into junk. Merrill Lynch junk bond guru Martin Fridson points out that the spread between high-yield bonds and U.S. treasury bonds are at the highest level since 1991. Furthermore, the rate of default, or failure to repay bonds, has been falling for the past few months; Moody's recently reported that the junk bond default rate in September fell to 9.2 percent from 9.6 percent, the seventh decline in the past nine months.

Those facts could translate into big returns. The case outlined by Fridson and others goes something like this: Returns for junk bonds are high if you're willing to take the risk. Meanwhile, the worst may be over for default rates, a persistent risk in the junk bond market.

"We think they are really attractive with a 20 percent to 30 percent return over the next two years," said Louis Stanasolovich, CEO of Legend Financial Advisors in Pittsburgh. "It would almost be by accident you wouldn't get a 25 percent return."

But it's risky

The catch? Junk bonds aren't easy to buy and even harder to sell. And investment advisers are quick to say that individual investors shouldn't play with junk bonds because the risk is too high.

"If you're interested in junk bonds, the best way to do it is through mutual funds," said Scott Berry, an analyst at Morningstar. "It sounds great to pay 80 cents on the dollar and get a dollar back, but there's a lot of downside risk."

Although the default rate on junk bonds has been falling this year, it remains high compared to historical norms. Moody's predicts a default rate of about 8.4 percent by the end of this year, and 7.4 percent by the end of the third quarter next year - a positive trend, to be sure, but there's still plenty of room for improvement considering the average annual default rate from 1970 through 1999 was 3.45 percent.

And the percentage of actual dollars involved with junk bond defaults is larger, because the size junk bond deals increased dramatically during the technology and Internet bubble of the late 1990s. On a dollar-volume basis, September's junk bond default rate was 18.3 percent, according to Moody's.

For the first three quarters of this year, 115 companies rated by Moody's welched on $138.8 billion of debt, compared to 139 companies defaulting on $71.5 billion in the first nine months of last year.

Especially dangerous are companies whose credit ratings plummet in a short period of time. Last month saw $6.2 billion in defaults from three companies whose bonds were rated "investment grade" just a year earlier, or less; this year, almost $42 billion in defaults came from companies that were rated investment grade not long before failing on their debt. More than half of that came from the bankrupt Worldcom, which had $23.2 billion in outstanding debt.

And if the floor falls out on company, investors may not be able to sell the bonds quickly. Junk bonds often aren't liquid assets.

"I'm still trying to liquidate some of my clients," said Stanasolovich. "We don't recommend investors play with individual junk bonds. It's like playing a baseball game with nitroglycerin."

The worries are well-founded. The collapse of the junk bond market in the late 1980s resulted in the loss of billions for small investors, and, fairly or not, turned Michael Milken into a poster child for Wall Street greed and excess.

That's one reason why junk bonds aren't as easy to buy as stocks. To buy a stock, you can log onto any online broker and trade within minutes. To buy a junk bond, individual investors have to go through a big brokerage firm such as Merrill Lynch and Salomon Smith Barney. Big discount brokerages also allow junk bond trading, but you'll have to know what you're looking for.

Diversify

If you're going to invest in junk bonds, buy a basket of them. To be properly diversified, planners recommend at least 25 and some urge 40 to 60 junk bonds to a portfolio.

Given the need to spread your bets, analysts say mutual funds are the best route. Indeed, a net total of $206.7 million surged into high-yield bond mutual funds for the week ending Oct. 16, ending a three-week streak of outflows, according to AMG Data Services.

Not that the experts are necessarily all that successful. Despite the double-digit percentage yields of individual bonds, many funds that specialize in junk have generated little or no profit for their investors in recent years. According to Morningstar, high-yield bond funds over the past 10 years produced an average return of 4.1 percent annually, or less than half of the S&P 500's annual return. However, the average junk bond fund has lost less than the S&P 500 over the past three years.

Common high-yield bond fund favorites include Northeast Investors' High Yield Bond Fund, which makes concentrated bets, but managed to avoid the telecommunications sector. T. Rowe Price, Pimco and Pioneer are also considered good junk bond fund managers, analysts said.

Berry said Janus also has a strong high-yield bond fund, surprising given the mutual fund firm's problems with its stock funds. "They have good credit analysis and steered clear of big blowups," said Berry.

And unless you're a credit analysis guru that can avoid big mishaps, it makes sense to let the professionals do the work.

"For most investors, it doesn't make sense to buy an individual junk bond," said Stanasolovich. "Most of these are negotiated deals with big institutions. The small fry (under a $100 million) should stay away."

-- Sergio G. Non contributed to this report.