In the past year, the proportion of junk notes outstanding owned by U.S. mutual funds and ETFs declined about 9 percent, or $21 billion, to a maximum of $240 billion, the analysts said in the report. Assets owned by high-yield closed-end funds, which also typically buy with borrowed money to boost returns, doubled to about $14 billion this year, “partly in response to a desire for leverage in a low yield environment,” the Barclays strategists said.

Yields on speculative-grade bonds, graded below Baa3 by Moody’s Investors Service and lower than BBB- at Standard & Poor’s, plunged to an all-time low of 5.98 percent on May 9, Bank of America Merrill Lynch index data show. They’ve risen to 6.7 percent as the Fed considers slowing stimulus that’s helped expand the central bank’s balance sheet by $2.75 trillion since Lehman filed for bankruptcy in September 2008.

Hedge funds “have moved where the yields are, even if those yields are historically relatively low,” said Edward Altman, a finance professor at New York University who created the Z-score formula for measuring bankruptcy risk. “They’re still a good deal higher than the very low yields on” investment-grade bonds and Treasuries, he said.

Fed Stimulus

Credit hedge funds have received $113.3 billion of deposits since 2009 and boosted assets under management to $648.3 billion as of June 30, according to data from Chicago, Illinois-based HFR. That contrasts with the two years ended Dec. 31, 2009, when investors yanked $86.65 billion from the funds as the world’s biggest economy sunk into recession.

To spur economic growth, the Fed embarked on an unprecedented program of keeping benchmark interest rates at about zero and buying Treasuries and mortgage debt, pushing investors to seek higher yields by buying riskier investments.

Investors from retirees to private-equity firms piled into the riskiest company bonds, allowing borrowers to sell $1.35 trillion of dollar-denominated speculative-grade bonds since 2008, boosting the market to $1.2 trillion from $727.6 billion, Bloomberg and Bank of America Merrill Lynch index data show. Relative yields on the notes have dropped to 475 basis points from as high as 2,182 basis points in December 2008.

When investment managers crowd into similar assets at the same time, especially those that aren’t frequently traded, the behavior may “create adverse market impacts if financial shocks trigger a reversal of the herding behavior,” the Treasury said in its report last week. Leverage can also increase the risk of systemic shock, it said.

At the same time, fund managers who are able to buy securities trading “significantly below their intrinsic values” could help stabilize price declines, according to the study.

The 21 primary dealers that do business with the Fed reduced their corporate-debt inventories by 76 percent through March from the peak in October 2007 as they faced higher capital requirements set by the 27-nation Basel Committee on Banking Supervision and risk-curbing rules laid out by the 2010 Dodd- Frank Act in the U.S.