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Fed offial warns of overheated debt markets

WASHINGTON — Some credit markets are showing signs of overheating as investors take larger risks in response to the persistence of low interest rates, a senior Federal Reserve official said Thursday.

The official, Fed governor Jeremy Stein, highlighted a surge in junk bond issues, the popularity of certain kinds of real estate investment trusts, and shifts in bank balance sheets as areas the central bank is watching closely, although he downplayed any immediate threat to the financial system or the economy.

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‘‘We are seeing a fairly significant pattern of reaching-for-yield behavior emerging in corporate credit,’’ Stein said in a St. Louis speech. He added, however, ‘‘it need not follow that this risk-taking has ominous systemic implications.’’

Stein gave no indication that the Fed is contemplating any change in its aggressive efforts to hold down interest rates.

Rather, he described the overheating as a trend that might require a response if it intensified over the next 18 months. But the speech nonetheless underscored that the Fed increasingly regards bubbles, rather than inflation, as the most likely negative consequence of its efforts to reduce unemployment by stimulating growth.

Critics of the Fed’s policies have pointed to the high-profile junk bond market as evidence that low interest rates are encouraging excessive speculation. Investors are eagerly providing money to companies and countries with low credit ratings — and they are demanding relatively low interest rates in return. Junk bond issuance in the United States set a new annual record last year — by the end of October.

Stein noted dryly that this may not ‘‘bode well’’ for investors in those bonds, but the Fed is not charged with preventing them from losing money.

In the wake of the financial crisis, regulators have focused increasingly on where investors get their money, reasoning that short-term funding is particularly vulnerable to panic. And Stein said that here, too, there was evidence that short-term funding was growing in importance. He described similar evidence of growing risks in other corners of the financial market, and emphasized that the Fed was also concerned about other kinds of financial speculation that it did not see.

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