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Summary

  • Recent bearish activity triggered selloff in high-yield debt.
  • More people are willing to go short large junk bond ETFs.
  • Inverse high-yield bond ETF gaining traction as an alternative.

By Todd Shriber & Tom Lydon

A recent surge in distaste for high-yield bond exchange traded funds is highlighted by several anecdotes, including the willingness of professional traders to pay up to short such ETFs.

The daily cost to finance short positions in the iShares iBoxx $ High Yield Corporate Bond ETF (NYSEARCA:HYG), the largest junk bond ETF, was $342,000 a day in the week ended Aug. 5, up from $7,000 at the end of December, reports Lisa Abramowicz for Bloomberg, citing DataLend.

It is less expensive, though far from cheap, to short HYG's primary rival, the SPDR Barclays High Yield Bond ETF (NYSEARCA:JNK). Traders were spending about $157,000 a day earlier this month to finance share loans in JNK with about 93% of the ETF's shares eligible to be shorted out on loan, Abramowicz reports.

Since the start of the third quarter, investors have fled high-yield bond ETFs with HYG bleeding $1.15 billion in assets. Only six ETFs have lost more assets than HYG over that period. JNK is lighter by $419 million in the current quarter. The State Street offering is usually the preferred avenue for professional traders looking to short a broad basket of junk bonds because the ETF often sports a wider deviation from its underlying index than does HYG.

Traders looking to establish bearish bets on high-yield bonds do not necessarily need to short HYG and JNK. They can consider long positions in the oft-overlooked ProShares Short High Yield ETF (NYSEARCA:SJB), an inverse but not leveraged play on the Markit iBoxx $ Liquid High Yield Index.

In fact, some traders appear to be taking note of SJB. The ETF has added $30.7 million in new assets this quarter. That may not sound like much, but the sum is impressive when considering SJB had $41.45 million in AUM at the end of the second quarter, according to ProShares data.

While the recent flight from junk bond ETFs has received ample attention, some market observers believe those departures were primarily the result of spooked retail investors fretting about the Federal Reserve raising interest rates. Notably, interest coverage, or the ability of an issuer to pay interest on its debt, remains robust for high-yield borrowers.

Last week, HYG and JNK saw combined inflows of over $620 million.

SPDR Barclays High Yield Bond ETF

(click to enlarge)

Tom Lydon's clients own shares of HYG and JNK.

Source: Traders Pay Up To Short Junk Bond ETFs