While many investors have revived their love affair withcorporate bonds this year, one stands out: Pacific InvestmentManagement Co.'s (Pimco's) Bill Gross.

His $3.6 billion Total Return exchange-traded fund (ETF) hasmore than quadrupled its allocation to such notes since January tomore than 41 percent of its holdings. Gross isn't the only one tofind high-grade corporate bonds more appealing lately, given thatmutual-fund investors have poured $63 billion into the debt thisyear after pulling record amounts in 2013, according to Wells Fargo& Co. data.

On one hand, this makes sense because the U.S. economy has beenpicking up and the most-creditworthy companies look pretty goodbased on their balance sheets.

On the other, this more-than-$5 trillion slice of the U.S. bondmarket is about as sensitive as it's ever been to moves inbenchmark interest rates, and the Federal Reserve's preparing toraise borrowing costs next year.

The extra yield, or spread, investors demand to owninvestment-grade company debt instead of Treasuries is near thelowest since before the 2008 credit crisis. This means any ripple effects from the Fed's exit will be all the more painfulfor holders of this debt.

“You have to be cautious and careful about this because we dothink higher rates are coming,” said George Rusnak, nationaldirector of fixed income for Wells Fargo Private Bank. “As spreadsare less, you're less protected.”

At the same time, benchmark bond yields aren't likely to risemuch during the next six months, so investment-grade corporatesecurities should hold their value, he said. When rates do rise,the notes may outperform junk bonds—which have benefiteddisproportionately from a search for yield amid unprecedented Fedstimulus.

Pimco's Total Return ETF, which follows a similar investmentstrategy as the firm's $223.1 billion Total Return Fund, has beensteadily increasing its corporate-debt holdings throughout theyear. The notes account for more than 41 percent of the fund now,compared with as low as 9.73 percent at the end of January,according to data compiled by Bloomberg.

The two-year-old ETF shrunk its allocation of government-relateddebt, reducing the proportion of such notes to 27 percent from40.23 percent at the end of last year.

Mark Porterfield, a Pimco spokesman, declined to comment.

The bets have paid off. U.S. high-grade notes are poised for anannual return of 10.4 percent, the most since 2009 when creditmarkets were rebounding from their seizure, according to Bank ofAmerica Merrill Lynch index data. Junk bonds, meanwhile, are ontrack for an 8.9 percent gain.

Investors are demanding 1.13 percentage points of extra yieldover Treasuries to own investment-grade debt, down from 6.56percentage points in December 2008. In June, the spread fell to1.06 percentage points, the lowest since 2007.

In other words, investors are demanding less and lesscompensation for owning debt that's safe enough.

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