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Short Bets on Biggest Junk ETF Near Record After Fed’s Backstop

Stock MarketsApr 14, 2020 12:09PM ET
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© Reuters. Short Bets on Biggest Junk ETF Near Record After Fed’s Backstop

(Bloomberg) -- Bearish wagers against the largest junk-bond ETF are building as skepticism grows that the Federal Reserve’s support will be enough to protect investors.

Short interest on the $16.3 billion iShares iBoxx High Yield Corporate Bond exchange-traded fund -- a rough indicator of bearish bets -- is near 38% of shares outstanding, according to data from IHS Markit Ltd. That’s close to a record of 39% reached in late February for the fund, which uses the ticker HYG.

Skepticism is returning after last week saw the biggest rally on record for the ETF, which soared on the back of the Fed’s plan to buy corporate bonds recently cut to junk, known as fallen angels, and certain high-yield funds. While the Fed’s support will help keep credit flowing amid the coronavirus pandemic, it does little to lessen the risk of cash-strapped companies declaring bankruptcy, according to Principal Global Investors.

“Actions to backstop high-yield eases the liquidity strain segment of high-yield spread widening, but it has less impact on the ‘insolvency risk segment’ of high-yield spread widening,” said Seema Shah, Principal’s chief strategist. “It doesn’t necessarily improve the outlook for bankruptcies.”

While the majority of the Fed’s purchases in the corporate bond market will be aimed at ETFs whose primary objective is U.S. investment-grade exposure, another portion will go to corporate high-yield ETFs, according to a primer.

HYG surged 6.6% in the aftermath of the announcement, capping its best week since the fund was created in 2007. The fund was little changed Tuesday as of 11:44 a.m. in New York, after dropping 1.4% Monday.

Not all junk-bond ETFs have seen a spike in short interest. The $10 billion SPDR Bloomberg Barclays (LON:BARC) High Yield Bond ETF and iShares Broad USD High Yield Corporate Bond ETF both soared last week, but short interest has fallen. Shorting shares could also reflect moves by investors to hedge other parts of their portfolios, rather than an outright bet on declines.

The fact that the Fed will only be buying falling angels means that the program isn’t necessarily a positive for the entire high-yield asset class, according to Columbia Threadneedle.

“Fed purchases will not extend into the tail of high-yield, and there is an argument to be made that default rates are not fully priced-in yet,” said Ed Al-Hussainy, a senior strategist.

©2020 Bloomberg L.P.

Short Bets on Biggest Junk ETF Near Record After Fed’s Backstop
 

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