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Risk premiums in that market are at their tightest level in 10 years, at an average of 2.63% over comparable Treasury yields. Demand has been so strong that even bonds of companies in bankruptcy, like auto supplier Delphi(DPHIQ.PK Quote) and fallen energy giant Calpine(CPNLQ.PK Quote), trade above par, meaning they trade at a premium to their issue price.

"Excessive liquidity has propped up very weak, frail companies," says Diane Vazza, head of global fixed-income research at S&P.

The default rate ended the year at 1.26%, according to Standard & Poor's. The rating agency expects defaults to inch up through 2007, to 2.5% to 3% by the end of the year -- still well below the long-term average of 4.5%. Indeed, cracks are appearing. The number of low-rated companies the ratings agency S&P has listed with a negative outlook or on watch for a possible downgrade in credit quality jumped in January to 27 companies -- its highest level in more than two years.

When will the undertow of liquidity snap back? The possible scenarios are plentiful: A surprise Japanese rate hike and subsequent unwinding of the carry trade could withdraw liquidity from the global marketplace. Emerging market leaders could impose capital controls like those tested in Thailand and investors would withdraw en masse from the more volatile hot spots. A conflict in Iran could cause oil to spike to $100, causing a surge of inflation that would drain liquidity.

These disasters are certainly possible. But like longtime junk bond market expert Martin Fridson, publisher of Leverage World, says: "The world ends much more frequently in the financial press than it does in the financial world."