Bernanke's Nonexistent Junk Bond Revival: Street Whispers

NEW YORK (TheStreet) - Conventional wisdom would have it that the loose policy of the Federal Reserve is pushing investors into risky assets such as junk bonds, driving down yields and giving cash-strapped corporations incentive to take advantage of low rates to lever up their balance sheets.

On the surface, the data supports such logic.

Junk bond issuance is on pace to shatter records in 2012, according to data from Dealogic, as highly-levered companies tap investors for some of the cheapest debt financings in history. The trend isn't expected to end anytime soon.

Fed chairman Ben Bernanke has signaled to markets the central bank won't raise short-term interest rates until mid-2015. The Fed's mortgage bond buying program - otherwise known as QE3 - is also forecast to remain in place long after inflation rises above current levels.

But, Wall Street investment banks and investors should be weary of misreading those surface trends heading into 2013. A closer look at the data signals corporations are far from gorging on record cheap debt and Ben Bernanke's oft-cited easy money may be more a of mirage in explaining low yields and booming junk bond markets.

In fact, for Wall Street players like Goldman Sachs(GS) , Morgan Stanley (MS) , JPMorgan(JPM) , Bank of America(BAC) and Citigroup (C) , a different read on present-day issuance records may signal a looming market bust.

Junk bond issuance is hitting new records because corporations are refinancing debts to simultaneously extend maturities and take advantage of today's low rates.

Records aren't being set because new companies are entering the market to add to their debt pile. There's a big difference between companies refinancing and those that are levering-up, even if the distinction isn't borne out in data, which shows over $322 billion in junk issuance as of Nov. 28, a 12.6% increase from the previous record annual pace set in 2010.