As rates continue to languish near record lows and more chase after riskier assets in search of higher returns, exchange traded fund investors are expressing a waning outlook on the fixed-income asset category.
According to S3 Partners data, investors are betting over $1.5 billion against ETFs tracking bonds over the past week, with five fixed income-related funds among the 10 most shorted ETFs over the period, Bloomberg reports.
For example, the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) saw the second-biggest increase in bearish bets from over 2,000 funds tracked by S3, with traders shorting $544 million worth of shares. Additionally, the iShares 7-10 Year Treasury Bond ETF (IEF) ranked third, with $381 million in new short positions.
The week delivered “a marked increase in fixed income short selling,” Ihor Dusaniwsky, head of predictive analytics at S3, said in a note. “Short sellers may be thinking that the yield curve has bottomed out in the short term and may be trending higher, causing the prices of the ETFs bond holdings to decline.”
Bond prices and yields exhibit an inverse relationship, so a rising yield corresponds with falling prices.
Some observers, though, note that bearish wagers could represent some healthy hedging alongside long positions, rather than an outright negative bet on bonds continuing to fall in price.
However, ETF fixed-income investors are been trimming their exposure to the bond markets. For example, among the most hated ETFs over the past week, the SPDR Bloomberg Barclays High Yield Bond ETF (JNK) saw $692 million in net outflows, followed by a $649 million withdrawal from iShares iBoxx $ High Yield Corporate Bond ETF (HYG), $498 out of the iShares 7-10 Year Treasury Bond ETF, and another $354 million from the iShares Short Treasury Bond ETF (NASDAQ: SHV), according to ETFdb data.
Looking ahead, Federal Reserve has shown its intent to buy more bond-related ETFs to support liquidity in the fixed-income market after the announcement in March of its intent to enter the market sparked record inflows.
For more information on the fixed-income market, visit our bond ETFs category.