Wednesday 03 February 2021 4:00 pm | Updated: Wednesday 03 February 2021 1:44 pm

GameStop: Might the Redditors target the bond market next?

They say a week is a long time in politics, but perhaps it is even longer in financial markets. Before institutional investors have even had the chance to fully take stock of last week’s events, which saw the David’s of retail trading get one up on the goliaths of the City institutions by sharing trading ideas over Reddit, the now infamous Wall Street Bets traders then sent silver to eight-year highs.

From stocks to silver in just over a week, this begs the question, which asset class will they turn to next?

The dramatic moves in GameStop Corp. (GME) and AMC Entertainment Holdings, Inc. (AMC) were of course on individual stocks. However, if these types of moves create broader equity and commodity market volatility in just one week, who is to say that we will not soon see corporate bond spreads widen and government bond yields fall as investors move out of riskier assets.

While the rise of these free trading platforms may not have the same sort of material effect on the debt markets as a whole, they can affect the bonds of the individual companies that are targeted by retail investors. It would be difficult for retail investors to directly drive the price of a bond the way they have driven stock prices — particularly as not all of the free platforms even offer access to the bond markets.

But a dramatic rise in equity price such as was seen at GameStop could entice the company to issue equity to pay off debt, which could have a positive effect on the company’s bond prices.

Also, as we saw with AMC, conversion of convertible debt to equity may occur, which could have a positive impact on the company’s bond prices. Since the start of this year, there have been $2 billion worth of trades in AMC bonds. AMC is also the most actively traded debt from a list of Russell 3000 Index RUA stocks.

Furthermore, we might also see increases in trading volume and liquidity for the bonds of these issuers as they gain more attention from investors.

There are, of course, significant differences between investment in stocks in comparison to bonds. With debt, investors are typically taking a longer-term view on a firm.

In contrast to frenetic trading that occurred in GameStop’s stock last week, buying and selling corporate debt quickly can get very costly. That said, particularly in light of events in the commodities markets over the past 48 hours, you would have to be a brave institutional investor to bet against bonds being the next.