As global debt markets began to convulse in 2007, former Citigroup CEO Chuck Prince famously stated that "as long as the music is playing, you've got to get up and dance."
His remark referred to the U.S. bank's then-continuing efforts to lend money to the least creditworthy of corporations, as a way of winning fees on deals and collecting high interest rates. Within two years, Citigroup needed a $45 billion government bailout to survive.
Now, analysts for the giant lender Bank of America have revived Prince's phrase to describe what's happening in the U.S. junk-bond market. Despite recent data suggesting that a recession might be due after a record-long 10-year economic expansion, companies are still borrowing furiously to take advantage of historically low interest rates, pushing up debt loads that may become unbearable if earnings start to weaken, according to a report Friday from the bank.
Investors, meanwhile, are buying up the risky assets partly because they're so starved for returns in a world where yields are so low. Deutsche Bank estimated that some $15 trillion of bonds globally are trading at negative yields - an unusual scenario where buyers are effectively willing to pay companies and governments interest on their debt; normally, the bond issuers pay interest to investors.
"The music is still playing, with debt levels rising again," wrote the Bank of America corporate-bond strategists, Oleg Melentyev and Eric Yu. "The prevalence of extremely low yields is pushing investors to take on extraordinary risks."
The bank's warning comes as some regulators, including Federal Reserve Chair Jerome Powell, have warned of excesses in the fast-growing market for loans to junk-grade companies, considered the likeliest to default with credit ratings below the lowest investment-grade category, BBB.
And the amount of BBB bonds sold by non-financial corporations has swelled to a record $2.3 trillion, or a record 60% share of all investment-grade bonds -- a worrisome dynamic because credit-rating reductions in a downturn could easily push those securities lower, swamping the junk-bond market.
Overall, non-financial U.S. corporate debt has grown by $4.3 trillion over the past decade, or 66%, according to the Bank of America report. And some $1 trillion of that is considered "private debt," consisting of loans or other instruments that aren't frequently traded, and thus may have less reliable pricing data.
"If the price of liquidity is steep in high-yield, which is relatively liquid compared to loans and even more so private debt, one needs to appreciate the degree of potential markdowns in those segments in a cyclical turn scenario," according to the analysts.
Big investment firms like Blackstone Group (BX) - Get Report and Apollo Global Management (APO) - Get Report have profited from the binge on junk-grade bonds and loans, relying on them to finance corporate takeovers at unusually low interest rates and increasingly investing directly in the debt itself.
Ford Motor (F) - Get Report , the giant U.S. automaker, had its credit rating cut this week to a junk-grade level by Moody's Investors Service, though it still has investment-grade ratings from the other two big grading firms, Standard & Poor's and Fitch.
The split assessment means that Ford bonds won't be designated as junk grade just yet under most investors' definitions. But if that happened, the company would represent the largest single issuer of dollar-denominated junk bonds from an advanced economy, the Bank of America analysts wrote.
For now, the junk-bond market appears buoyant enough to take the news in stride: "This should be a manageable event," according to the Bank of America analysts.
But a downturn in corporate earnings could put severe pressure on the market. An erosion in recent years of contract terms designed to protect lenders and investors in a default means that losses might prove outsize.
"No other question is more important to understanding the cyclical dynamic here than the ability of corporations to turn the corner on anemic earnings growth in coming months and quarters," the analysts wrote. "Stay conservative in credit quality."