Sri Lanka sold $500m of bonds on Tuesday with a yield of just over 5 percent – its lowest ever – after raising $1bn in January in a separate bond issuance with a 6 percent yield.

The low yields (or the variable interest Sri Lanka pays annually for borrowing the $1.5bn) suggests investors are not concerned about the country defaulting in paying back the debt. Heavy demand for the bonds this week (orders totaled $4bn) also meant Sri Lanka could offer a lower return to attract investors.

Sri Lanka’s central bank was elated, saying after the Tuesday’s issuance: "This [lower] yield reflects the continued confidence that international investors have placed in [Sri Lanka’s] sovereign bonds."

Sri Lankan brokers were similarly gushing. HSBC Sri Lanka chief executive Patrick Gallagher said: “The ability of [Sri Lanka] to keep attracting a strong investor base is testament to the positive credit story of the country and the untiring efforts of the Central bank.”

However, an analysis by Reuters of global bond purchase trends suggests a different driver at work: amid extraordinarily low returns from bonds issued by the US and Eurozone countries (where interest rates are at record lows and are likely to continue for a long time), investors’ “desperate need for higher-yielding assets” is compelling them to take on risky investments elsewhere.

“With yields in the euro zone at multi-year lows and 30-year US Treasuries offering less than 3.6 percent, investors are again scrambling for higher-return assets [elsewhere]- a hunger that such pariah credits, are well placed to satisfy,” Reuters said.

It is in this context that Sri Lanka and Zambia, both junk-rated by credit agencies, and insurgency-riven Pakistan, have sold bonds this week, while countries like Greece and Ecuador that hit investors hard by defaulting heavily are again planning new issuances, and “many other problem debtors - from Dubai, engulfed in a debt crisis in 2009, to Ukraine which has only just signed up to an IMF loan to avert default - are eyeing the market,” Reuters said.

Greece, where investors lost heavily recently in the restructuring of its $130 billion in earlier borrowing, could issue new debt also at between 5 and 6 percent, Reuters quotes investors as reckoning.

Pakistan, rated seven notches below investment grade by credit agencies, is borrowing $2bn this week, offering investors over 8 percent – which, Reuters says,

“to many investors will be a no-brainer - offering them three times more yield than equivalent US Treasury bonds.”

Jennifer Vail, head of the bonds division at US Bank Wealth Management, which manages $115 billion of bonds, told Reuters:

"We are in a very low-yield environment … Folks are looking for yield and as long as we are in this kind of environment folks are going to embrace risk."

“Relative to what you get domestically [in US], such yields are attractive ... Folks who are buying these things aren't thinking of the stress - they are thinking of the [large] coupon.”

While in 2007 US interest rates and long-term bond yields were at over 5 percent, the Federal Reserve is not expected to raise interest rates beyond 1 percent by end-2015.

In this context, a factor driving demand is that pension and insurance firms need higher returns on their bond investments to meet their payout obligations (e.g. to 78 million US retirees born 1946-64), Reuters said. “Many of these funds may have no recourse but to venture into higher-risk bonds if they are to match future obligations.”

The Financial Times reported demand for Sri Lanka’s new bond this week was particularly strong from US investors, who took up almost half the deal.

Sri Lanka says its economy grew at a rate of 7.2 percent last year, although the Financial Times, citing recent analysis from Deutsche Bank, says some investors have cast doubt on the accuracy of official government growth data.