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Hedge funds betting on risks in US bluechips debt

February 9
10:04 AM 2016

Hedge funds are parking their funds in bonds as they bet on rising risks in the US blue chip debts. Majority of hedge funds consider the $4.5 trillion market as the safest for US corporate debt. Some hedge funds foresee that concerns may stretch beyond energy and junk bonds. The spread between investment-grade credit ratings and US Treasury securities is widening further. 

Perry Capital, a New York-based hedge fund, has placed $1 billion wager against the investment-grade bonds issued by 10 companies. Perry Capital holds view that they are susceptible to economic downturn, rising interest rates and other adverse conditions in the economy. Moreover, the hedge funds bets and other investment strategies reflect uncertainty in the global economy.

The economic uncertainty and sluggish financial markets indicate that problem may deepen and may not be confined to energy and junk bonds. Investment grade debt was held up during the pummeling of junk bond market. The difference between investment-grade credit ratings and US Treasury securities has widened to two percentage points for the first time since June 2012, as reported by The Wall Street Journal (WSJ).

The betting by hedge funds on US blue chips debt may crack any time. Cohanzick Management LLC manages $1.6 billion and is anticipating further tougher environment in the financial markets. Cohanzick has bet about $50 million against investment-grade bonds.

The fears about Greece economic crisis and possible debt default triggered panic selling across the global financial markets in 2012. During this period, the spread between investment-grade credit ratings and US Treasury securities widens alarmingly. The widening of spread indicates investor demand for higher yields as they consider the risks on those bonds are increasing, as reported by Market Watch.

Andrzej Skiba, an investment-grade bond-fund manager at BlueBay Asset Management, said: "I believe we're in a market that can still be quite punishing." Skiba has parked 20 percent of his holdings in safe haven government bonds and is open buy more corporate bonds, when other are forced to sell

USA Today reports that after facing turbulent situation in 2015, hedge funds are being crushed this year so far as stocks are plummeting. The average hedge fund investment in stocks fell 3.66 percent in January 2016, according to the latest data from Hedge Fund Research. Major hedge funds fell over 10 percent in January.

If the funds are doing ok and investment-grade debt weakens further, then it'll signal negative situation for the economy health. The wider bond spreads make them expensive for companies to issue debt. It'll also put pressure on supply of credit and economic growth. Hedge funds preferred to invest in the pharmaceutical sector in 2015 as there was active merger and acquisition (M&A) activity. Now, these hedge funds are suffering from increasing concerns over drug prices.  

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