The iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG) and the SPDR Barclays High Yield Bond ETF (NYSEArca: JNK), the two largest high-yield corporate bond exchange traded funds by assets, are drawing bearish bets.
“Demand to short the three largest exchange-traded funds tracking the asset class surged to more than $7 billion this week, according to data from Ihs Markit Ltd. published Wednesday. That’s the highest on record,” reports Bloomberg.
HYG’s underlying index, the Markit iBoxx USD Liquid High Yield Index, also requires holdings to have at least $400 million in par value, and the debt issuer must have at least $1 billion in total debt outstanding. Due to their similar focus on liquidity, the two high-yield bond ETFs have similar portfolios.
HYG more closely tracks its underlying index as the fund accurately reflects the prices available to the fund – mew bonds are added to the index at the ask but are subsequently priced at the bid, which helps reduce the gap with its index, but this also reduces the index’s return.
Year-to-date, HYG and JNK are two of the 10 worst ETFs in terms of outflows.
“Short interest as a percentage of shares outstanding on the $15 billion iShares iBoxx $ High Yield Corporate Bond ETF, ticker HYG, hit an all-time high of 29 percent Monday, Markit data show,” according to Bloomberg. “Add elevated shorts on the SPDR Bloomberg Barclays High Yield Bond ETF, ticker JNK, in concert with a European counterpart, and bearish sentiment has piled up even as junk-bond spreads recover from the selloff earlier this month.”
Bond investors have been dumping their exposure to the more riskier segment of the fixed-income market as U.S. Treasury yields reached a level that triggered a global sell-off. However, stocks have rebounded this week.
With yields on more conservative debt going up, traders view the yields on junk debt less as less attractive in comparison relative to the risk exposure.
“The potential for a short squeeze looks elevated considering the funds’ indicative gross dividend yields over the next 12 months. At over 5 percent — the amount traders would have to pay lenders annually — shorting JNK is no free lunch,” reports Bloomberg.
For more on bond ETFs, visit our Fixed Income category.