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If the U.S. economy is headed for trouble, no one told the junk-bond market.

The premium that investors demand to hold debt from sub-investment-grade companies instead of relatively safe Treasurys has shrunk to near pandemic-era lows, a sign of dwindling worries about an economic slowdown that would cause a big jump in defaults and bankruptcies.

Low-rated debt has been swept up in a broad market rally fueled by signs of cooling inflation and hopes for interest-rate cuts. Attracted by yields around 8%, investors have added a net $3.7 billion into junk-bond funds so far this year, according to Refinitiv Lipper—the first inflows in that period since 2020.

Bonds of all kinds are rebounding after three straight months of hotter-than-expected inflation data rattled markets, denting investors’ hopes for interest-rate cuts. Now, signs of cooling price increases have rekindled bets that the Federal Reserve could cut rates more than once this year, according to CME Group data.

There are signs of stress lurking. The default rate has ticked up to 5.8% of #junkbond issuers over the 12 months through March, its highest level in three years, according to a Moody’s Ratings analysis. That figure includes bankruptcies and out-of-court debt restructurings…

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