Yields on the notes globally plunged to 6.31 percent on Jan. 25 from a peak of 23.2 percent in December 2008 after investors funneled $72.4 billion last year into funds that buy the debt, according to the Bank of America Merrill Lynch index and EPFR Global data.

Investors deposited $12 billion into floating-rate funds in the past 34 weeks, according to Bank of America Corp. Last week’s unprecedented inflow helped boost the funds’ net assets by 6 percent year to date and offset the $1.3 billion of withdrawals from global junk bonds in the period.

Stein’s Warning

“We are seeing a fairly significant pattern of reaching- for-yield behavior emerging in corporate credit,” the Fed’s Stein said in a Feb. 7 speech in St. Louis. If the observation is accurate, he said, “it does not bode well for the expected returns to junk bond and leveraged-loan investors.”

Investors bought $100 billion of loans last year that didn’t restrict the borrowers’ debt to earnings or interest expense, JPMorgan strategists led by Peter Acciavatti wrote in a report last month. That exceeds the prior high of $99 billion in 2007. Covenant-lite loans now account for a record 29 percent of the outstanding debt, topping the 18 percent share before the credit crisis.

Junk-rated borrowers sold debentures that received an average covenant score of 4.15 in November on a scale from one to five, with five being the least restrictive, according to Moody’s Covenant Quality Index. That was the weakest level in data going back to January 2011.

“It’s crazy,” Maglan’s Tawil, who said his fund gained 41 percent last year, said by phone from New York. “The government is going to continue to fuel this.”

Low Rates

The Fed has held benchmark interest rates at about zero since December 2008 and plans to purchase $85 billion in bonds to ignite an economy still recovering from the worst financial crisis since the Great Depression. The government intends to suppress borrowing costs for the world’s largest economy as long as unemployment remains above 6.5 percent and inflation remains no more than 2.5 percent.

The jobless rate rose to 7.9 percent last month from 7.8 percent in November and December.