LONDON (Reuters) - As global watchdogs warn that euphoric financial markets are divorced from economic reality and acting out some reprise of the credit bubble and bust of the past decade, fears of another subprime timebomb are inevitable.
But even if you believe another crisis is brewing, it's most likely not where it was last time. At least not in U.S. securitised mortgages - the heart of systemic blowout that nearly brought down the global banking system in 2008.
A mix of tighter regulation, stricter underwriting standards and the lowest new mortgage applications in almost 20 years means sales of private U.S. mortgage-backed securities have dwindled to just $600 million (350 million pounds) so far this year - a mere sliver of the record $726 billion of new bonds in 2005.
For what it's worth, new U.S. bonds backed by subprime mortgages chave all but vanished. Bonds backed by subprime U.S. auto-loans have taken up some of the running, but not on anything like the same scale.
Yet in its latest annual report the Bank for International Settlements, the Basel-based forum for the world's major central banks, seemed pretty convinced global debt markets are once again in risky territory and heading for a fall.
The BIS focused mainly on fresh accumulation of new corporate and sovereign debt by asset managers rather than banks and scratched its head about the coincidence of sub-par economic activity and record low default rates that in turn depress borrowing rates and credit spreads ever lower nearly everywhere.
'Exuberant' equity and real estate and rock-bottom financial volatility merely fed off that picture, it said. And it added that if all this was simply due to zero official rates, it could all suddenly go into reverse when they rise.
"It is hard to avoid the sense of a puzzling disconnect between the markets' buoyancy and underlying economic developments globally," the report mused.
Low-grade corporate rather than household borrowing was marked out for special attention.
New sales of 'junk' bonds worldwide hit a quarterly record of $148 billion between April and June, according to ThomsonReuters data. That's up from average quarterly sales of around $30 billion before the last credit bubble burst.
Additionally, more than 40 percent of new syndicated loans signed for companies last year were low-grade leveraged loans - more than in the 2005-2007 period. Increasingly the money was raised without creditor protection in terms of covenants.
So could this be the new subprime? Banks' inability to hold large inventory of these bonds since the crisis helps insulate the banking system per se but their limited ability to broker the market risks a stampede for the exit if prices become hard to find - with all the attendant shock that could deliver to corporate finance generally as well as savers and fund managers.
After all, it was the post-crisis retrenchment of straight bank lending that pushed many firms to move en masse to the bond markets and seek investors direct. If that avenue is cut off suddenly and refinancing difficult, a shockwave would ensue.
And yet for investors grappling with a 'safe' government bond universe with inflation-adjusted yields of less than one percent, junk bonds may be their only avenue to meet targets. And that won't change until interest rates do.
Ditto for high-risk government bonds - in particular the high-risk segment of the euro zone and emerging markets.
Despite a shakeout in larger developing economies over the past year, appetite has been brisk for the more exotic debt of recent defaulters and bankrupt nations such as Greece and Cyprus or Ecuador and Jamaica, as well as a whole sweep of sub-Saharan Africa countries from Kenya to Zambia.
New debt from high-risk 'frontier' nations, for example, hit a record $16.3 billion for the first six months of this year, Societe Generale estimates.
Indeed, the welter of new bonds sold in recent years by African nations - just over a decade after multilateral debt forgiveness was agreed for many of them - led Nobel laureate Joseph Stiglitz to describe the bonds as "Africa's subprime".
But even though potentially worrisome for poorer countries seeking 'no strings attached' borrowing instead of cheaper concessional lending or slower foreign direct investment, the scale of debt involved is nowhere near levels marking a systemic threat for the global financial system.
The BIS, then, is at most just flagging the risk of higher interest rates. "The sustainability of this process will ultimately be put to the test when interest rates normalize."
The seeming inevitability of rates rising from next year suggests investors should already be bracing for some serious turbulence, if not quite on 2007 levels.
Yet many still believe central banks will hold off until the last minute because underlying economies will remain subpar for years to come as a result of aging demographics and the relentless paydown of past debts. And with inflation subdued, rates will likely only rise modestly even when they do go up.
Another Nobel laureate, Paul Krugman, this week scoffed at the idea interest rates were artificially depressed.
"There simply isn't any macroeconomic case for claiming that interest rates are wildly depressed relative to fundamentals, and not much reason to believe that assets in general are overvalued," he wrote in his New York Times blog.
Maybe this time it really is different.
Additional reporting by Sujata Rao and Dan Burns; Editing by Ruth Pitchford