• Research

Nov 4, 2016

S3 BLACKLIGHT: Longs & Shorts Are Bearish in TLT, LQD, HYG & JNK Bond ETF’s

There were large outflows in several of the major bond ETF’s in the 4th quarter, but in addition to long shareholders becoming bearish, short sellers were also more bearish in these bond ETF’s.

The iShares 20+ Year Treasury Bond ETF (TLT US), the iShares IBoxx USD Investment Grade Corp Bond ETF (LQD US), the iShares iBoxx USD High Yield Corp Bond ETF (HYG US) and the Spider Barclays High Yield Bond ETF (JNK US) had over $9.6 billion in ETF outflows and increases in short interest in the 4th quarter. This more than offset the $7.9 billion of ETF inflows and decreases in short interest in the first three quarters of 2016.

The bullish bias in these four ETF’s paid off as the LQD, HYG and JNK ETF’s were up just over 8% each and the TLT was up just over 14% in the first three quarters of 2016. The 4th quarter rewarded the bears as the LQD, HYG and JNK ETF’s were down over 2% and the TLT was down 4.4%.

The bearish momentum in these bond ETF’s is accelerating not diminishing, with $4.3 million in ETF outflows and increases in short interest occurring in the first four days of November while $5.3 billion occurred in October. This bond sell off may have started with the shorter duration corporate junk bonds (the HYG ETF with a 4.5 year duration and 5.4% yield and the JNK ETF with a 4.1 year duration and 5.8% yield), but has spread to investment grade corporates (the LQD ETF with 12.5 year duration and 2.9% yield) and long term treasuries (the TLT ETF with 26.5 year duration and 2.33% yield). This bearish momentum may continue after next week’s presidential election and last until the Federal Reserve meeting on December 14th.

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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