Very high risk junk debt is now growing as a proportion of the high yield bond market, creating fears of what could happen if the market turns.

According to the FT:

'In the US, nearly 16 per cent of bonds are rated CCC or below [ junk bonds with the highest risk of default], up from about 13.5 per cent at the end of 2005, as measured by the Merrill Lynch high-yield index.' The European market has also seen record issuance of CCC-rated paper.

Mahesh Bhimalingam of Barclays Capital worries that:

'When the cycle turns and the environment is no longer benign, these lower-rated issues could be on the brink of defaulting.'

Meanwhile Martin Fridson of research publication Leverage World has done some analysis which suggests:

'Recent high levels of low-quality debt issuance could push default rates sharply higher – from fewer than 2 per cent of high-yield borrowers last year to as much as 17 per cent – if the US were to experience a recession.'

That is a big if and as the article stresses, nobody is hitting the alarm button just yet. But it has been a great few years for high yield paper as yields have fallen and defaults have been very scarce. It is bound to turn one day.