Kyle Bass, the hedge fund manager who made $500 million in 2007 betting against subprime securities, is now buying shorter-term mortgage-backed bonds and junk corporate debt, expecting that hyperinflation will lead to higher interest rates.

Funds advised by Hayman Advisors LP bought mortgage bonds equal to about 50% of assets, Bass wrote in a letter to investors Oct. 2. The Dallas investment firm also added corporate debt, primarily high-yield loans and bonds, equal to about 25% of assets.

Bass, whose main fund has lost more than 17% this year after missing the recovery in equity and credit markets, wrote that he is buying securities with so-called short duration as he predicts that the actions of central banks and governments to rescue the financial system will produce "outright currency debasement."

The United States alone has lent, spent or guaranteed $11.6 trillion to rescue the economy. Federal Reserve Chairman Ben S. Bernanke "and crew have done a masterful job of pulling out all the stops (and then some) to save the U.S. and world banking system from collapse," Bass wrote. "Based on our thesis of impending inflation and competition for sovereign capital as world governments run huge fiscal deficits (and sell debt to finance them), we are investing cautiously in credit."

Bass started Hayman in 2006 to specialize in corporate turnarounds, restructurings and mortgages. The main fund more than tripled in 2007 while betting against subprime mortgages as defaults rose to a record.

Hayman is targeting the most senior types of mortgage bonds, assuming home prices may decline further as unemployment rises and consumers struggle with debt, the letter said.

Typical senior subprime mortgage securities with a projected average life of one year yielded 6 percentage points more than the one-month London interbank offered rate as of Friday, according to Deutsche Bank AG data. This compares with an average spread of 10.5 percentage points during the past year and the current spread of 10 percentage points on three-year subprime securities.

Hayman is targeting shorter-duration assets, expecting that rates will begin to rise over the next 18 to 24 months after an unprecedented period of printing money worldwide.

Bass compared central bankers' efforts to combat the global recession to a game of "Monopoly" in which new money is introduced halfway through. Inflation is likely to result as investors fret that the central bankers, who have enabled governments worldwide to sell record amounts of debt at low rates, will be too slow to withdraw liquidity, he said.

"We are today in the midst of what economists often refer to as the 'golden' period where everything feels good and the long-term effects of deficit spending and money printing have not yet been realized," he said. "This period typically lasts 12 to 18 months."

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