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Investors are betting against Tesla's bonds amid growing worries about the electric car maker's ability to deliver on its production goals, given significant delays for the Model 3.
"While equity short sellers continue to hang around, shorts in the most liquid TSLA bond have made a tidy profit so far in 2018," Sam Pierson, director, securities finance, at IHS Markit said in a Monday note. "They have not covered to lock in the profit, suggesting that they think the credit will continue to deteriorate."
Last week, Tesla shares also tumbled into a bear market, or more than 20 percent below their record high hit in September.
Ninety-nine percent of lendable supply for shorting Tesla's high-yield bond has been used, sending the cost for new short positions in the bond to their highest ever, Pierson said. Bets against that bond account for the bulk of the total short demand of $261 million for Tesla debt, according to IHS Markit.
The eight-year bond, which matures in 2025, was trading with a yield of 6.58 percent Monday, according to IHS Markit.
Traders bet against a stock by borrowing and then selling shares in expectations they can buy them back cheaper later, or cover their shorts. It works the same for bonds basically.
Short interest in Tesla's junk bond
Source: IHS Markit
To fund accelerated production for its Model 3 sedan, Tesla raised a more-than-expected $1.8 billion in its first high-yield junk bond offering in August, despite poor appetite at the time for risky assets. However, the eight-year bonds fell in the last week to 92.5 cents, their lowest since the issuance, according to IHS Markit. Prices move inversely to yields.
The electric car company led by Elon Musk has burned through billions of dollars while it struggles to deliver on many promises. Tesla initially set a 5,000-a-week production target for the Model 3 by the end of 2017, but has since pushed that goal out by half a year.
S&P has a negative B rating on Tesla and a negative outlook, as of August 2017. Representatives from the ratings agency and Tesla were not immediately available for comment.
Short interest in Tesla shares has also increased to 17.9 percent, Pierson said. The total dollar amount of nearly $8.7 billion is second only to the $9.7 billion short balance in shares of Apple, the largest U.S. stock, according to exchange data as of the end of February cited by Pierson.
"Tesla shares may be nearing a cross-road," Pierson said. "With the short demand for Tesla increasing through the recent sell-off — and the short demand for bonds fully utilizing the available supply — it appears short sellers are looking for more downside before they begin to cover."
Tesla shares closed 0.88 percent higher Monday, still down 2.3 percent for the year so far.
— CNBC's Robert Ferris contributed to this report.
Correction: S&P has a negative B rating on Tesla and a negative outlook, as of August 2017. An earlier version misstated the month.