IMPEACH BUSH

NEW YORK, July 28 (Reuters) - The amount of U.S. investment-grade bonds trading at distressed levels has risen close to an all-time high, a sign that a wave of mega-bankruptcies is likely on the way, a veteran high-yield strategist said.

Bonds are considered distressed when their yields, which move in the opposite direction of prices, exceed 1,000 basis points over those on U.S. Treasuries.

The distressed trading levels in both investment-grade and speculative-rated bonds "suggests that we will see record-sized bankruptcies by volume into 2009-2010," said Christopher Garman, writing in high-yield research publication Leverage World.

About 1.8 percent of high-grade bonds by par value are trading at distressed levels, slightly under an all-time high of 2.4 percent, according to Garman, publisher of Leverage World and former head of high-yield strategy at Merrill Lynch & Co Inc.

About 27.2 percent of high-yield bonds by par value are distressed, Garman said.

Strategists often track junk bond distressed levels as a precursor of default rates, but high-grade borrowers are now contributing nearly 20 percent to total distressed bond volumes, or nearly 70 issues, Garman said.

"The largest corporate bankruptcies on record often follow this level of distress," Garman said.

Including both high-grade and high-yield issues, about 7.5 percent of total corporate bonds are trading at distressed levels, pointing to nearly $97 billion of defaults through 2009, Garman said.

That level of distress is the same seen during the credit downturn of 2000 to 2002, a period when the largest corporate bankruptcies on record were filed.

Credit crisis fears, especially in the financial sector, have pushed spreads on several companies into distressed territory recently, though rating agencies still consider their default risk low.

High-grade companies trading at distressed levels in recent days include Washington Mutual Inc (WM.N: Quote, Profile, Research, Stock Buzz), CIT Group Inc (CIT.N: Quote, Profile, Research, Stock Buzz), Ambac Financial Group (ABK.N: Quote, Profile, Research, Stock Buzz) and Capmark Financial Group Inc, according to MarketAxess.

Garman's report echoed similar findings on high-yield stress by rating agency Standard & Poor's.

About 23.5 percent of the U.S. junk bonds S&P tracks were distressed in July, up from 13.7 percent in June, the agency said in a report on Friday. Troubles in the auto sector accounted for a big part of the rise in distressed debt, S&P said. (Reporting by Dena Aubin; Editing by Jonathan Oatis (dena.aubin@thomsonreuters.com; +1-646-223-6325; Reuters Messaging: dena.aubin.reuters.com@reuters.net))