Yield chasing describes a scenario in which a central bank maintains interest rates at low or negative levels. Typically, the central bank's monetary policy operates under a zero interest rate policy (ZIRP) or a negative interest rate policy (NIRP).

In a ZIRP or NIRP environment, the returns on government fixed-income securities are insufficient, prompting investors to seek higher yields by pursuing riskier financial assets. Behavioral finance theorists suggest that when faced with a choice between a certain loss and a poor gamble, most individuals will choose the gamble.

Moreover, people are often reluctant to acknowledge their poor decisions, making them more susceptible to questionable narratives that reframe a fundamentally bad investment as a favorable one. Yield chasers who invest in risky bonds to achieve better returns than the low or negative rates on safer bonds create a narrative that downplays the credit risk involved.

For instance, in the oil sector, they might subscribe to the speculative belief that oil prices will remain consistently high. If they enhance returns by taking on exchange risk, they reassure themselves that fluctuations in currency exchange rates will remain unusually stable.

In the equity and real estate markets, phrases like "there is nowhere else to go" or "TINA" (There Is No Alternative) have become common. However, a rational individual would recognize that prices already reflect the desperation of investors facing a lack of interest income.

This is where financial engineers come into play. Their role is to manipulate the capital structure of firms to enhance apparent rates of return in a rising equity market. During these periods of financial scarcity, the demand for their expertise surges.

The primary strategy they employ is to increase leverage while attempting to disguise this as much as possible, as investors suffering from income scarcity are particularly vulnerable. The result is an escalating financial fragility that accompanies the accumulation of malinvestment.

Even yield chasers may harbor fears of a market downturn, yet they convince themselves that such an event is unlikely to occur in the near term, striving to maintain the existing structure as much as possible.