The Ex-Goldman Trader Who Correctly Shorted Subprime Mortgages During The Financial Crisis Has Made A New Bet

Joshua BirnbaumREUTERS/Jim YoungJoshua Birnbaum, former Managing Director of Structured Products Group Trading for Goldman Sachs

When he was at Goldman Sachs in 2007, Josh Birnbaum made a huge bet against subprime mortgages. 

Now he’s betting against something else: high-yield bonds.

From The Wall Street Journal:

“Joshua Birnbaum, the ex-Goldman Sachs Group Inc. trader who made bets against subprime mortgages during the financial crisis, now has more than $US2 billion in wagers against high-yield bonds at his Tilden Park Capital Management LP hedge-fund firm, according to investor documents.”

On Monday, The Wall Street Journal published a big report on the worries facing investors in the junk bond space amid the sharp decline in the price of oil. Bonds tied to the energy sector make up about 15% of the high-yield space. 

Back in early December, Josh Brown wrote, “The question now is whether or not the slide in crude can do enough damage in the high yield market to set off a chain reaction of de-risking, default and outflows.”

As the Journal reports, junk bonds this year have returned less than 1% after gains of around 7% last year and 15% in 2012. 

On Friday, the effective yield for high-yield bonds closed at multi-year highs, topping 7% and also topping the yield seen during the “taper tantrum” in the spring of 2013.

A rise in bond yields implies that investors are worried about the ability of borrowers to repay their obligations. In the event of a default, junk bond holders are often the first to take a “haircut,” or to not get the full value of their investment back.

The rise in the yield for junk bonds also comes amid a rally, or decline, in the yield on Treasury bonds, as investors seek safety amid unsettled markets. 

Here’s the crazy spike in high yield. 

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