These people are just playing with fire in the junk bond market.

As investors buy and push bond prices up, credit spreads -- the extra interest a company or country pays above that paid by the U.S. government on its bonds -- have shrunk. The average spread among companies tracked by a key Merrill Lynch junk-bond index has fallen to less than 3.5 percentage points, compared with more than 4.5 percentage points in mid-May. Meanwhile, the spread on J.P. Morgan's emerging-market bond index has fallen to an all-time low of about 2.9 percentage points from about four percentage points in May. The Russian government, for example, now pays only about 1.5 percentage points more than the U.S. Treasury to borrow money.

Bond investors' behavior does have some rational explanations. In the U.S., low inflation, steady economic growth and strong corporate profits suggest that borrowers will be able to make their debt payments. Outside the U.S., high prices for oil and the other commodities that many emerging economies export have spurred growth and bolstered those countries' finances.

But with even the riskiest bonds paying meager returns, investors such as hedge funds have raised the stakes by adding leverage, that is, borrowing money to buy bonds. One indicator of leverage is the amount of money that bond dealers lend to their clients in so-called repo deals. According to Bianco Research LLC, an independent research firm, that number exceeded $3.5 trillion as of June 29 -- the highest on record. The booming market for credit derivatives, contracts that provide insurance against corporate defaults, also had added leverage.