Everything Rally Burns Investors Who Piled Into Junk-Bond Shorts
(Bloomberg) -- A red-hot rally in risk assets is singeing bond bears who loaded up on short wagers ahead of this week’s U.S. presidential election.
Short interest as a percentage of shares outstanding on the $26.5 billion iShares iBoxx High Yield Corporate Bond ETF (ticker HYG) climbed to over 25% on Tuesday, the highest level since April, according to data from IHS Markit Ltd. On the $12.8 billion SPDR Bloomberg Barclays High Yield Bond ETF (ticker JNK), that measure jumped to 8.6% on Tuesday, also the highest in seven months.
The uptick in bearishness came ahead of the election, which -- although it has yet to produce a definitive winner -- sparked a surge in risk appetite as odds of a Democratic-controlled Congress faded and Joe Biden appeared to take the lead. High-yield bonds have rallied as well, with HYG and JNK on track for their strongest weekly performances since June.
The jump in junk is likely painful for those investors who took chips off the table heading into the election, with HYG posting its biggest week of outflows since February last week. The bull case for high-yield credit is strong, considering that valuations are still attractive despite the rally and the Federal Reserve is committed to keep interest rates low, according to Richard Bernstein Advisors LLC.
“Many investors went into the election light on risk, and are now reversing that action,” said Michael Contopoulus, director of fixed income at RBA. “Investors have meaningfully re-calibrated their views on high-yield over the last few days.”
The change of heart is evident from looking at flows in the $4.4 trillion ETF market. After withdrawing roughly $3.7 billion from HYG last week, investors have poured $2.6 billion back into the fund over the past four days -- on track for the biggest weekly cash influx since early June. Meanwhile, JNK has absorbed over $700 million so far this week, the most in a month.
Read more: Credit Markets Gear Up for More Debt Sales as Junk Yields Drop
The Fed’s foray into the corporate bond market at the height of March’s coronavirus turmoil helped dramatically compress junk bond spreads to Treasuries. The promise of more Fed support combined with an insatiable global search for yield should keep funds like HYG and JNK supported, according to Guggenheim Investments’ Scott Minerd.
“We’re still going to have a meaningful rise in those because if you’re a yield-oriented investor, like a mutual fund or an insurance company, the pie at which you can get attractive yields is getting smaller and smaller,” Guggenheim chief investment officer Minerd said on Bloomberg Television Thursday.
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