MW Why prominent short-selling firm Muddy Waters is now targeting credit
By Jules Rimmer
Carson Block recommends put spreads on some of the ETFs providing exposure to corporate credit
Block thinks one piece of AI technology could repalce as many as seven workers in years to come.
Activist short-seller Carson Block has turned bearing on corporate credit, arguing the advent of artificial intelligence will lead to severe job displacement and the economic repercussions of this will be negative on credit spreads.
As a consequence, he has started a short-selling strategy on exchange-traded funds that focus on corporate bonds like BlackRock's iShares iBoxx $ High Yield Corporate Bond ETF HYG and iShares iBoxx $ Investment Grade Corporate Bond ETF LQD. Although the timing of trades is complicated by the unpredictability of the labor market and how fast companies may start shedding jobs and replacing them with AI software, Block reckons the market's reaction will pre-empt the actuality itself.
Block is well-known as the founder and chief executive officer of Muddy Waters Capital, a hedge fund and investment research firm, with a string of successful bearish bets to his name. He was interviewed on Bloomberg television Tuesday where he outlined his conviction that the pace of AI adoption is speeding up dramatically and that within a period of three to five years could see many companies across America replace employees with some form of AI technology.
Block thinks as many as seven jobs could be replaced by one AI technology and he cited the example of the legal industry where he's now using Anthropic's Claude software to replicate tasks for which law firms were previously invoicing him.
Although not spelt out precisely during the interview, the implication of Block's trade rationale is that higher unemployment means economic weakness and this would in turn lead to deteriorating corporate financials.
Given the unpredictability on timing, Block explained that instead of simply shorting the stocks now and having that exposure for an indeterminate period, he prefers to use options and in particular, he recommends bear put spreads. Put spreads involve the simultaneous purchase and sale of put options with the same expiry but different strike prices.
These are examples of what Block describes as convex trades, which have a non-linear, upward payoff profile but have limited downside exposure to adverse moves.
One factor reinforcing Block's motivation for shorting credit is his opinion that there is too much passive investing in the market that automatically exaggerates moves when they come.
Furthermore, the underlying instruments on which ETFs are based are less liquid than the ETFs themselves. This means when fundamentals deteriorate, it's difficult for the ETFs to meet redemptions quickly enough.
Block's concerns crop up at a time when the market is extremely concerned about developing problems in the private-credit sector and the potential spillover from any crisis there would also impact the publicly-traded credit markets.
-Jules Rimmer
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(END) Dow Jones Newswires
April 01, 2026 06:52 ET (10:52 GMT)
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