Bearish bets against high-yield bond ETFs hit record levels this month and the activity appears to be partly driven by Wall Street credit brokers who are offering large trades to clients.
The iShares iBoxx High Yield Corporate Bond (NYSEArca: HYG) and SPDR Barclays Capital High Yield Bond (NYSEArca: JNK) are the largest junk debt ETFs.
Bloomberg News reports that Bank of America (NYSE: BAC) traders who helped dealers move $1.5 trillion of credit-default swaps index contracts in 2012 began offering clients the ability to trade blocks of HYG last month.
“As the high-yield ETF market has grown, we’ve seen institutional investors using high-yield ETFs to build portfolios and manage risk,” said Matthew Tucker, head of iShares fixed-income strategy for BlackRock, which manages HYG. “They’ve been looking for ways to both go long the high-yield market and hedge against losses.”
Shares on loan from both HYG and JNK were above 10% this month, according to the report. ETFs can be shorted like individual stocks. Investors borrow shares of the ETF and sell it to another party, hoping the price declines and they can buy it back, return the shares to the original owner, and pocket the difference. Investors short ETFs to hedge long positions or speculate on market weakness.
The number of borrowed shares in HYG and JNK almost doubled last month, Bloomberg reports. [Record Bets Against High-Yield Bond ETFs]
“To the extent that investors want to hedge both their credit risk and their interest-rate risk, selling the ETFs can make sense,” said Eric Gross, a credit strategist at Barclays, in the article.