The Federal Reserve’s decision Wednesday to deepen its easing program means investors will continue their rush to high-yield (junk) bonds in an effort to capture yield, says Lawrence McDonald, who specializes in junk-bond trading as head of LGM Group.
And the end result won’t be pretty, he tells CNBC.
The Fed plans to keep short-term interest rates near zero until unemployment falls to 6.5 percent. It’s the low rate environment that has investors eager for junk bonds.
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"The market is thirsting for yield, and the Fed is pushing people to do things like this," McDonald says. "So big asset managers are reaching, reaching, reaching. Companies know this and are issuing, issuing, issuing all this crap."
Indeed, companies have issued $293 billion of junk bonds this year through November, easily beating the $271 billion record for all of 2010, according to Citigroup data cited by CNBC.
The finish won’t be a happy one, McDonald says. "There's no question that the punch bowl is about to be taken away, and people are going to be left holding the bag."
The junk bond surge may well end badly, says Wall Street Journal columnist Jason Zweig. But he’s not sure that investors deserve all the blame.
“Who is acting irrationally?” Zweig writes. “When the Fed gives individual investors little choice but to take extra risk, whom should pundits point their fingers at? The investors? Or the policymakers?”
Editor's Note: This Wasn’t an Accident — Experts Testify on Financial Meltdown
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