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When dotcoms crashed, sub-prime imploded and banks collapsed it was not hard to find the markets’ Cassandras who had spotted the problem and either made millions betting against the bubble or written a book explaining how it was all going to go wrong.
Today, another bubble is ballooning but unlike those that have gone before it most investors, policymakers and analysts are well aware of its existence and the problems it could create.
Sales of high-yield debt – or, as they were once known, junk bonds – have exploded this year. In January alone, non-investment grade Asian companies, those whose debt is ranked by credit rating agencies as riskiest, sold just over $9bn (£6bn) of high-yield bonds, a year-on-year increase of more 6,000pc, according to figures from data provider Dealogic. In Europe, sales of high-yield debt is also running at record levels and nearly $30bn of bonds have been sold so far this year.
The massive increase so soon after a financial crisis that was caused in part by the credit meltdown has raised fears that less than five years on from the bankruptcy of Lehman Brothers and the near failure of Royal Bank of Scotland and HBOS, the world is setting itself up for another crash.
In large part, the explosion in demand for high-yield debt has been a direct consequence of the response of Western governments to the last crisis. Since Lehman’s collapse, some $12 trillion has been pumped into the global financial system by central banks across the world in an effort to prop up banks and maintain low interest rates.
The impact of this unprecedented monetary stimulus has been to create a potent mix of historically low yields on government bonds and rising inflation, forcing even the most conservative of investors to hunt for yield in an effort to preserve their capital and achieve a return.
“What you’ve basically seen is people who don’t really want to take more risk being forced up the risk curve to get the yield they need,” says one London-based bond trader.
However, the concern is that much of the money being pumped into high-yield debt is not only from speculators, but supposedly conservative institutions like pension funds and large insurers. The chief executive of one insurer admits privately to the problems faced in finding places to invest. “It’s a real problem. We have fixed liabilities and we have to get a certain return in order to meet them. A few years ago you could get the yield you needed from a triple-B issuer, but today to get the same return you are looking at double-B or lower,” he said.