It definitely feels like investors are getting overexuberant, and you can stay in overexuberant conditions for a while,” says Key Private Bank's Fred Senft. "But when it turns it will turn quickly and it will turn very ugly.”
First half high-yield corporate bond issuance of $331B blew away the already perky levels of the last three years (2013's was about $250B) as yields on the BAML Global High Yield Index plumb new record lows. Even Japan's notoriously risk-averse Government Pension Investment Fund is considering scrapping its practice of only buying investment-grade paper and venturing into junk.
Senft's day of reckoning could be coming near, with junk-rated borrowers having $737B in debt needing to be refinanced or paid off in the next five years. "It's about as extreme as it gets," says Marty Fridson, who estimates spreads are about 200 basis points too tight.