So far, most of the rout in the debt markets has been linked to the US subprime mortgage debacle. Increasingly, however, many hedge funds are betting there is far worse to come for the corporate debt market as well.

Hedge fund managers and the trading desks of some of the savviest firms on Wall Street are expecting a severe downturn in the corporate debt market. A big part of their bet is that bonds will perform far worse than in previous meltdowns, because financial engineering has created so many layers of debt on top of unsecured bonds, which are the last debt to get paid in the event of a default.