After recording huge losses following the GameStop Corp. (NYSE:GME) trading frenzy earlier this year, hedge funds are now looking beyond equities to focus on junk- and investment-grade rated bonds for short bets.
What Happened: Hedge funds have accumulated the biggest short position on junk bonds since 2008 amid fears of rising interest rates and warnings over bond valuations, according to a report by Bloomberg.
Citing data from IHS Markit, the report noted global high-yield bonds worth as much as $55 billion are on loan to traders seeking to profit if prices fall. This is the largest balance since the fall of 2008. This compares to about $35 billion of bonds that were sold short at the start of this year.
About $30 billion worth of bonds have been borrowed in the euro-denominated investment-grade market, the largest loan balance since early 2014, as per the report.
Speculators are reportedly predicting sovereign yields for longer-dated bonds will rise due to an increase in inflation forecasts and on potential monetary policy tightening by the Federal Reserve.
Why It Matters: Investment firms and hedge funds that manage wealth often take short positions in an effort to capitalize on falling markets by profiting on stocks or other various securities if they happen to go down in value.
Amateur traders belonging to the Reddit Investor forum r/WallStreetBets bid up heavily shorted stocks such as GameStop and AMC Entertainment Holdings Inc. (NYSE:AMC) to create a short squeeze earlier this year.
The flurry of buying by retail investors forced bearish investors, including hedge funds, to unwind their bets against the stocks and sparked a rally in these stocks in January.
It was reported in January that hedge fund Melvin Capital Management, which was at the heart of the GameStop trading frenzy, lost 53% on its investments in that month.
Price Action: GameStop shares closed almost 2.6% higher on Tuesday at $146.92, while AMC Entertainment shares closed almost 3.2% higher at $10.05.
Read Next: Has The GameStop Sell-Off Started?
Photo by Chris Potter on Flickr