Credit investors are rapidly unwinding bullish positions in high-grade credit-default swap indexes, with bullish bets plunging by about a fifth in recent weeks, according to Bloomberg data. BNP Paribas SA indicators show investors are now short risk as conflict in the Middle East and AI disruption concerns drive a market mood shift.

This reversal comes after a year when the safest credit market segments were insulated from most risks. Viktor Hjort, global head of credit strategy at BNP Paribas, notes that investors are selling out of fear amid uncertainty. The shift is most visible in CDS indexes, which have evolved from pure hedging tools into popular market direction indicators due to their high liquidity and quick reaction to news.

The rapid positioning change is hitting valuations across credit markets, with risk premiums on global high-grade corporate bonds approaching their highest levels since last summer. Steve Caprio of Deutsche Bank warns that US and European high-yield bonds' exceptional winning streaks typically end abruptly. The turnaround has made hedging popular again after being considered a waste of money for the past year.