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Mar 8, 2017

S3 BLACKLIGHT: Fixed Income ETF Short Interest Spikes on Impending Fed Funds Move

With the possibility of a March 15th Fed Funds rate hike rising to a 98% certainty according futures trading, short sellers have been hedging their interest rate exposure with fixed income ETFs. Three of the top five one week increases in ETF short interest are fixed income based ETFs.

Short interest in these three fixed income ETFs increased from $6.4 billion at the end of February to $8.5 billion by March 7th. This $2.1 billion of new short increase is a 33% jump in one week. Not only are shorts increasing their positions, but long ETF holders, who had increased their holdings by an average of $396 million each week for the first two months of 2017, sold $274 million of their fixed income ETF holdings in the first week of March.

If the Fed Funds implied probability of March 15th hike remains above 95%, a relative certainty, short selling in these three ETFs should continue. HYG, with short interest at $5.3 billion, is nearing its historical high of $5.5 billion set in November 2016 and should top that figure by over $1 to 2 billion if short demand continues at this rate.

Traders are primarily using these fixed income ETFs as hedges to their fixed income positions or dividend paying equity positions that will lose value when the Federal Reserve raises the Fed Funds rate. Short interest increased as the probability if the Fed move increased, especially in the HYG.

For more information on the above analysis, please contact:
Ihor Dusaniwsky, Head of Research, S3 Partners, LLC     Ihor.Dusaniwsky@S3Partners.net
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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