Short Interest in High-Yield ETFs Hits Record as Rate Rises Loom

(Bloomberg) -- The recovery in high-yield bonds is on thin ice, according to a growing pack of investors willing to make a hefty wager on their conviction.

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.

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. 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.

Short Interest in High-Yield ETFs Hits Record as Rate Rises Loom

"Investors are hedging against a pop in the U.S. 10-year -- lot of guys are positioning for 3 percent or plus," said Dave Lutz, head of ETFs at JonesTrading Institutional Services.

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.

And not everyone’s selling: HYG took in a hefty $491 million Tuesday, its second-largest allocation in 2018, bringing some respite from a $2.3 billion outflow so far this year. The short positioning may also underscore the health of the marketplace, with ETFs absorbing bearish sentiment while allowing investors to hedge some of their long positions in the underlying market.

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