Investors Getting Skittish With Junk Bond ETFs

July 25th at 8:00am by Tom Lydon

It has been a nice ride for high-yield bond exchange traded funds. For the three years ending July 23, the iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG) and the SPDR Barclays High Yield Bond ETF (NYSEArca: JNK) were up 25% and 25.7%, respectively.

Gains from here could be limited as investors are growing anxious over riskier debt after Federal Reserve chairwoman Janet Yellen warned about a sooner-than-anticipated rate hike. Add to that, there is mounting evidence that investors are hedging and/or taking profits in high-yield bond ETFs.

“The number of outstanding put options in HYG earlier this month topped the number of outstanding ‘calls’ by a ratio of more than eight to one,” reports Chris Dieterich for the Wall Street Journal. That is highest put/call ratio in HYG in 14 months, according to the Journal.

In the week ending July 23, investors pulled $441.5 million from HYG and $113 million from JNK. JNK is frequently used by short sellers to establish bearish positions on junk bonds because its tracking relative to its underlying index is great than that of HYG.

Short positions in high-yield bond ETFs are on the rise. “The proportion of outstanding ETF shares on loan to short-sellers is up to 14.94%, up from 11.82% a month ago, and 8.35% a year ago,” the Journal reported citing Markit data.

Since the start of July, the two ETFs have bled a combined $1.3 billion. [Getting Cautious With Junk Bond ETFs]

Last week, it was reported that investment-grade ETF inflows have increased five times that of high-yield ETFs. The corporate bond market has experienced strong performance due to the falling yields in Treasuries and diminished inflation expectations this year. [Demand Favors Corporate Bond ETFs]

However, 10-year Treasury yields reside around their lowest levels in a year, prompting some traders to speculate that interest rates are destined to move higher and do sooner than later.

Open interest in the HYG September $92, $93 and $94 puts is a about 107,000 contracts combined, according to OptionMonster data. JNK closed just over $41 Thursday and there are 25,000 puts in that ETF’s open across the September $39, $40 and $41 strikes.

iShares iBoxx $ High Yield Corporate Bond ETF

hyg

ETF Trends editorial team contributed to this post. Tom Lydon’s clients own shares of HYG and JNK.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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