Some of the world's most sophisticated credit investors have been ramping up their bets against junk bonds even as retail investors have been pouring money into the asset class.
The list of junk-bond bears includes GSO, the credit arm of Blackstone; Apollo Global Management; Centerbridge Partners; Oaktree Capital; and a host of credit and so-called "macro" hedge funds, according to executives familiar with the firms' investment activities.
These investors began paring their junk-bond holdings during late 2012. In more recent weeks, some have been taking short positions in the market, betting that the price of junk bonds will decline and their yields will go up.
(Read More: How the Fed Is Pushing Investors to Buy Junk Bonds)
The pessimism of the big alternative investment firms has been stoked by the recent ravenous retail appetite for junk bonds. During 2012 and the early days of 2013, massive inflows into funds buying these securities led to a narrowing of the spreads between the interest rates on junk bonds and those on Treasury securities.
As the spreads came in, many of the big funds looked to get out, fearing that junk bond prices could suffer in any economic scenario. If the economy deteriorates, the rising probability of default could cause spreads to widen. If the economy improves, yields would rise – and prices fall – for all manner of fixed-income securities.