Bond Hubris Overwhelms Fed in Riskiest Credit-Market Sectors

Bond investors trying to divine when the Federal Reserve will reduce its unprecedented monetary stimulus are increasingly looking to the riskiest parts of the debt market, which are booming like before the financial crisis.

The amount of loans made this year that lack standard protections for lenders exceed the all-time high set in 2007, and only one other time have investors pumped more money into funds that buy lower-rated loans than they did last week. Bonds rated in the lowest category of junk accounted for the greatest percentage of speculative-grade offerings last month since 2011.

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The market for so-called covenant-light loans that lack typical lender safeguards such as limits on debt has already soared to $155 billion this year, beating the record $96.6 billion in 2007, according to Standard & Poor’s Capital IQ Leveraged Commentary and Data.

Junk-bond sales rose 24 percent to $235.3 billion through Aug. 9 compared to the same period a year ago, according to data compiled by Bloomberg. Those securities and leveraged loans are rated below Baa3 by Moody’s Investors Service and less than BBB-at S&P.

Sales of payment-in-kind, or PIK, notes, which allow borrowers who can’t meet interest obligations to pay with additional debt, total more than $6.5 billion this year, on pace to top the $8.1 billion issued in 2012, Bloomberg data show.

Corporate bonds in the lowest rating tier of CCC made up 10.3 percent of the $22.4 billion in high yield sales in July, the most since 2011, according to JPMorgan Chase & Co.