Subprime woes hit junk bonds - Gross

NEW YORK (CNNMoney.com) -- Woes plaguing the subprime mortgage market are spreading to junk bonds, according Bill Gross, manager of the world's largest bond fund.

Credit markets are facing a "sudden liquidity crisis" in the high-yield bond sector as a growing lack of confidence has frozen future lending, the PIMCO bond manager wrote in an August investment newsletter posted on the PIMCO Web site.

"Both borrowers and lenders may have bitten off more than they can chew, and even those that swallow their hot dogs whole -- Nathan's Famous Coney Island style -- are having a serious bout of indigestion," he wrote.

The subprime mortgage market, in which loans are granted to high risk borrowers despite little or poor credit, has been battered by rising default rates and delinquencies.

U.S. mortgage lenders, including bankrupt New Century Financial, as well as Countrywide Financial (down $3.92 to $30.14, Charts, Fortune 500), which slashed its full-year earnings estimates Tuesday, have been stung by massive losses. Two Bear Stearns (down $2.86 to $131.39, Charts, Fortune 500) hedge funds were also virtually wiped out.

The "subprime crisis" is not isolated, Gross warned, saying he expects corporate lenders to feel a pinch from subprime housing defaults as well.

Gross said he expects the U.S. economy overall to take a hit as cheap financing gets harder to come by, affecting company buyouts and stock buybacks.

Junk bonds plummeted Tuesday following Gross's statement, and Wall Street firms postponed a $3.1 billion debt sale to pay for the leveraged buyout of General Motors' (down $0.48 to $34.64, Charts, Fortune 500) Allison Transmission unit.