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AUG 3, 2016

S3 BLACKLIGHT: Shorts Buying Back LQD but Selling HYG & JNK Corp Bond ETF’s

Investors have been buying the three major corporate bond ETF’s in size since mid-July with $12.4 billion of inflows.  The IShares IBoxx $ Investment Grade Corporate Bond ETF (LQD US) led the way with $8.4  billion, followed by  the IShares IBoxx $ High Yield Corporate Bond  ETF (HYG US) with $2.5 billion  and coming in third was the Spider Barclays High Yield Bond ETF (JNK US) with $1.5 billion of inflows.

Short sellers have also been active in these three ETF’s. Even though LQD has the largest market cap of the three, with $31.5 billion,  it has the  lowest short exposure of the three with only  $504 million of short interest. The S3 Velocity Indicator, a measurement of real time relative change in shorting activity, has been trending downward since the beginning of July. LQD’s short interest has dropped $197 million, or 28% since mid-July.

HYG is the most shorted of the three ETF’s with $5.4 billion of short interest on a market cap of $15.6 billion.  Traders are taking both sides of the trade in this high yield corporate bond ETF with $1.9 billion of new shorts, a 56% increase, since mid-July to pair with the $2.5 billion of inflows. The  S3 Crowding Indicator, a measure of the magnitude of real time shorting  activity relative to market cap  and float, had seven  instances of significant  easing throughout July  but  recently,  on  August 1st,  we  saw  a  crowding  event, reversing the  previous easing  trend. The  S3 Velocity  Indicator started  to spike up significantly on July 27th, with all three trend lines, 7 day, 30 day and 90 day, trending upwards today.

JNK has the smallest market cap of the three corporate bond ETFs at $11.7 billion. Short interest was up slightly since mid-July, up $51 million or 6% with total short interest at $903 million. The  S3 Crowding  Indicator  and Velocity Indicator both  showed a reversal  from July’s easing  trend for  JNK with a crowding spike on  August 1st and the 7 day trend line moving  upwards starting on July 29th.

Although all three major corporate bond ETF’s had significant inflows since mid-July, only the LQD, investment grade corporate bond ETF, showed short side easing. Both the high yield, HYG, and junk, JNK, corporate bond ETF’s had an increase in short interest, short crowding spikes and a reversal in short momentum.

While long holders are looking for corporate bond exposure throughout the ratings curve, short sellers are closing out their investment grade positions and increasing their lower rated exposure.

For more information on the above analysis, please contact:

Ihor Dusaniwsky, Head of Research, S3 Partners, LLC
The information herein (some of which has been obtained from third party sources without verification) is believed by S3 Partners, LLC ('S3 Partners') to be reliable and accurate. Neither S3 Partners nor any of its affiliates makes any representation as to the accuracy or completeness of the information herein or accepts liability arising from its use. Prior to making any decisions based on the information herein, you should determine, without reliance upon S3 Partners, the economic risks and merits, as well as the legal, tax, accounting and investment consequences, of such decision.

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