(Bloomberg) -- The Federal Reserve’s looming rate cuts are fueling a rally in the riskiest corner of the US corporate bond market, but some investors are concerned the party may not last.

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On Wednesday, the Fed is expected to cut interest rates for the first time in four years. Signs that the US economy is slowing and inflation cooling have prompted some bond traders to call for up to a half-point interest-rate cut. As risk markets have broadly rallied, junk bonds have gained 7.4% this year, and have outperformed Treasuries in recent weeks, with spreads narrowing 69 basis points, or 0.69 percentage point, since Aug. 5.

Amid this rally, the riskiest debt is gaining the most. Spreads on CCC rated debt, the lowest tier that usually trades, have tightened for seven straight sessions through Tuesday’s close, reaching 685 basis points. That’s their narrowest since April 2022, toward the start of the Fed’s latest tightening campaign.

“High yield bonds are extremely overvalued, plain and simple,” according to Marty Fridson, chief executive officer at FridsonVision High Yield Strategy, and a veteran strategist at firms including Morgan Stanley and Merrill Lynch.

Fridson’s valuation analysis is based on inputs including credit availability, capacity utilization and industrial production, the default rate, and the Treasury market. According to his model, the market is overvalued by more than one standard deviation.

The long-awaited rate cuts expected to start on Wednesday should make it easier for CCC rated companies to access debt capital markets, rather than filing for bankruptcy as their existing debt comes due. But the Fed is also trying to manage the growing signs of slowing economic growth, a weakening that could weigh on companies with high debt loads.

Bill Zox, a portfolio manager at Brandywine Global Investment Management, says it’s hard for investors to stay disciplined in such an environment.

“It should not come as a surprise that the financial markets might be overdoing it before the rate cutting party has even begun,” he said in an interview. “The Fed should, but probably won’t, tamp down on that exuberance.”

Having said that, Zox regards most of the high-yield market as “very healthy” at the moment. He emphasizes that the “real danger” lies in the riskiest portion of the market. Less aggressive rate cuts or a more severe economic slowdown would make it harder for troubled companies to work their way out of very difficult situations, he added.