Yield-Hungry Investors Gobble Up Junk Bonds

After five and a half years of the Federal Reserve keeping short-term interest rates near zero, investors say they have no choice but to seek ever-riskier securities to generate any type of return. That means almost any borrower is able to sell bonds with few questions asked—whether it’s a nation with a history of defaults or a corporation with an ultra-low credit rating. Even Japan’s risk-averse $1.25 trillion Government Pension Investment Fund said it’s considering loosening its practice of only buying investment-grade debt and venturing into junk bonds. “You can stay in overexuberant conditions for a while,” says Fred Senft Jr., director of fixed income and equity research for Key Private Bank. “But when it turns, it will turn quickly and it will turn very ugly.”

The value of bonds tracked by the Bank of America Merrill Lynch Global High Yield Index has soared to more than $2 trillion. It took 12 years for the index, started at the end of 1997, to reach $1 trillion, and only four years to add another trillion. More than $350 billion of high-yield debt has been sold this year, putting 2014 on track to top last year’s record $477 billion.