Junk bonds have nearly doubled from their lows during the credit crisis, with the benchmark Merrill Lynch index of high-yield bonds surging to a three-year high.
But experts say the mania may soon come to an end, and things may turn ugly. Companies have issued $172 billion of junk bonds so far in 2009, already an annual record, according to research firm Dealogic, The Wall Street Journal reports.
Are we repeating the bubble scenario of the last decade?
"Bondholders got burned" buying deals in 2005 through 2007 because indentures, or the contracts that govern the bonds, didn't protect them, Adam Cohen, founder of Covenant Review research firm told The Journal.
"They said 'never again,' but now in a hot bond market, people are buying into those covenant loopholes all over again, and they're going to get burned again."
Investors are seeking alternatives to Treasuries, which offer the lowest yields in decades. Junk bond yields exceed those of Treasuries by 6.2 percentage points, according to Barclays Capital indexes.
Not everyone sees the junk bond rally as irrational.
“Money is coming into the sector, partly because many investors do not see great prospects for stocks,” Martin Fridson, global credit strategist at BNP Paribas Asset Management, told the Financial Times.
“Investors do not expect an economy that will be booming but are expecting slow growth.”
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