FILE PHOTO: PG&E crew work on power lines to repair damage caused by the Camp Fire in Paradise, California, U.S. November 21, 2018. REUTERS/Elijah Nouvelage/File Photo

NEW YORK (Reuters) - Bonds of PG&E Corp PCG.N, owner of the biggest U.S. power utility by number of customers, plunged on Monday after the company said it is preparing to file for Chapter 11 bankruptcy protection as it faces liabilities linked to wildfires in California.

Nearly all of PG&E’s roughly $18 billion of bonds were trading sharply lower, sending their yields, which move in the opposite direction, to record highs. The largest drops were concentrated in shorter maturities, implying that the market continues to price in some expectation of recovery.

The biggest moves were in bonds maturing in May 2021 694308GV3= and September 2021 694308GW1=, which both fell by nearly 8 points in price, and the October 2020 694308GT8= bond, which was down by 6.6 points. Their yield spreads, or the measure of the additional yield demanded by investors to hold riskier corporate bonds over safer U.S. Treasury securities, shot to 11.16, 10.04 and 12.35 percentage points, respectively.

That is significantly higher than the 4.5-percentage point average spread of high-yield notes over Treasuries, according to the relevant ICE BofAML indexes.

“There’s no real money selling at the long end, reflecting the expectation that there is recovery value. The short end is under a little more pressure and bonds are down about 1 point,” said an investor who asked to remain anonymous because of their active position in the bonds.

“Bonds will now likely avoid hitting the high-yield market which will make the high-yield investors happy and when the company returns to market after bankruptcy, they should have access. Again, for now, a decent recovery is being priced into the bonds and we are not seeing forced selling right now.”

Buying and selling at the short end, however, has been significant enough to push trading volume of the bonds in aggregate to their third-highest day in the last two years, according to data from MarketAxess.

PG&E issues were the top four most-traded U.S. corporate bonds on Monday, MarketAxess data showed, of which the most actively traded was a $3-billion note coming due in March 2034 694308GE1=. The price of the 2034 bond has dropped 8.4 percent in the past week, with yields up 13.5 percent. Seven of the top 10 most traded belong to PG&E.

Short positions in the company’s bonds have more than doubled from early December to $651 million today, with an increase of $250 million over the last week, when Reuters first reported that the company was mulling a bankruptcy filing, according to Samuel Pierson, analyst at IHS Markit.