Hedge Funds Make Biggest Short Bet on Junk Bonds Since 2008
Laura Benitez and Tasos Vossos, 07 May 2021
Hedge funds have accumulated the biggest short position on junk bonds since 2008 in another sign that investors are lining up to bet against frothy debt markets. About $55 billion of global high-yield bonds has been sold short, according to data from IHS Markit Ltd. That’s up from $35 billion at the start of the year.
The heady mix of rich valuations and willingness of bond bulls to throw cash at ever-riskier companies is raising alarm bells that credit markets are looking increasingly stretched. Add in the threat of rising interest rates, and there’s plenty of reason for some investors to be nervous.
“I would expect that list to get bigger as spreads tighten and/or people get worried about rates rising,” said Tim Winstone, a portfolio manager at Janus Henderson, which oversees 294 billion pounds ($409 billion). “At these levels of valuations, I’m not surprised more people, such as hedge funds, are setting shorts.”
In the euro-denominated investment-grade market, roughly $30 billion equivalent of bonds have been borrowed, the largest loan balance since early 2014. Bond investors including Pacific Investment Management Co. have been cutting down on broad-brush bullish bets lately, citing expensive valuations after a rally that has run for over a year.
The trend is having an impact on the performance of deals in the secondary market. Almost one out of four high-yield bonds sold this year is indicated below the price it was issued at, based on data compiled by Bloomberg.
