Biggest Credit ETF Sees Shorts Soar
(Bloomberg) -- ETF traders are increasingly wary of the corporate bond market as inflation anxiety boils over.
Short interest in the $41 billion iShares iBoxx $ Investment Grade Corporate Bond exchange-traded fund (ticker LQD) is now 21.5% of shares outstanding, the highest on record, according to data from IHS Markit Ltd.
The onslaught of bearish sentiment comes as price pressures threaten to send U.S. long-dated yields higher -- a worry that only intensified after April’s surprise jump in consumer prices. Already LQD investors have been yanking cash out by the billions: the fund has seen $11.3 billion in outflows so far this year, after absorbing nearly $15 billion in 2020.
Higher yields puts LQD and funds like it in a particularly vulnerable position, given its duration -- or sensitivity to interest-rate changes -- clocks in at a relatively hefty 10 years. With Treasury yield curves poised to steepen, that should spell trouble for LQD, Academy Securities said.
“We could see some pressure on bonds, especially LQD as people are afraid of the rate risk. LQD has a very long duration,” said Peter Tchir, the firm’s head of macro strategy. “The yield risk is greater than the spread risk for me.”
LQD has dropped 6% so far in 2021, after rallying 8% last year as the Federal Reserve’s credit market backstop to blunt the pandemic’s impact spurred a rush of issuance and inflows. However, with central bank policy makers insistent that post-lockdown price pressures are transitory, LQD has been selling off alongside Treasury bonds.
Even if the inflation anxiety is overblown, there’s better places to find value in the fixed-income market than investment-grade credit, said Seema Shah, chief strategist of Principal Global Investors.
“Perhaps some of the fears are overdone if the Fed remains resolutely accommodative even in the face of elevated inflation, as they have indicated,” Shah said. “Overall though, with spreads already so tight and bond yields likely on an upward trajectory given the inflation path, there are other parts of the fixed income market, such as high yield or emerging markets, which will outperform.”
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