NEW YORK (MarketWatch) -- A fivefold surge in the sale of junk bonds, a drop in borrowing spreads to two-plus-year lows, and heightened buzz about a coming wave of leveraged buyouts are the latest signs that credit markets are getting close to their pre-crisis levels -- and, to some observers, sowing the seeds for a dangerous new borrowing binge.
Companies sold $54.3 billion in U.S. high-yield debt during the first quarter of the year, according to Dealogic, up from $9.6 billion a year ago, as the sharp drop in interest rates made it cheaper to borrow. Including investment-grade debt, bond sales in March rose to their highest level since May.Last week, the growing debt issuance turned swap spreads, a metric of how issuers adjust their interest-rate exposure, negative for the first time on record.
And borrowing costs measured by corporate-bond spreads have returned to December 2008 levels, though they are still far higher than they were before the housing bust.
Selling debt has become much cheaper for companies as the credit crisis fades into history and investors lay their hopes on the recovery of the economy.
Plus, there's little allure for investors to lend to some of the most stable borrowers, such as the U.S. government.
The Federal Reserve's 15-month policy of keeping rates near 0% alongside a pledge to keep them low for a "extended period" have pushed 10-year Treasury yields (U.S.:UST10Y) to 3.94%, after falling to record lows from around 5.25% when the Fed started cutting in 2006.
Yields on 1-month CDs have fallen to 0.47%, from 2.5% in 2007, according to Bankrate.com.
For some private-sector analysts, as well as Federal Reserve policy makers, this lengthy period of low benchmark rates and investor appetite for higher returns poses a risk of again pushing the economy to an unsustainable reliance on debt -- not far from the situation that led to the credit crisis just a few years ago.
"We look at this as a replay of what happened in 2007," said Walter Zimmermann, chief technical analyst for United-ICAP.
Midway through the last decade, investors increasingly piled into much riskier assets, including mortgage-backed securities. They were hunting for a slightly higher yield after the Fed's decision to keep interest rates at 1% for one year in 2003-04 helped flatten yields on government debt.
That demand for higher yields pushed borrowing costs for companies to extremely low levels by 2007, when problems with too much leverage started to materialize within the massive and various securitizations distributed around the world, eventually leading to the credit crisis.
"The need for yield was felt to counteract otherwise low interest rates," he said. "That turned out to be one of the most disastrous investments of our age."
Some officials, such as Kansas City Federal Reserve President Thomas Hoenig, have warned that the Fed risks "distortions in the economy" and creating an asset bubble by keeping rates very low for too long.
