Three of the top five largest increases in ETF short exposure over the last month were corporate bond ETFs. The iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) had the largest increase of short interest of all ETFs over the last month with an increase of $1.6 billion, followed by the Spider Bloomberg BarCap High Yield Corporate Bond ETF (JNK) in fourth place with an increase of $1.0 billion followed by the iShares iBoxx $ High Yield Corporate Bond ETF (HYG) at fifth with an increase of $433 million. Along with this $3.1 billion increase in short exposure there were $7.7 billion in outflows by long ETF holders. In all, there was $10.8 billion of negative based trading on both the long and short side of these three ETFs over the last month.
Although short interest in these three corporate bond ETFs increased substantially, the positions have not paid off handsomely with short sellers up only $61.5 million, or +0.64%, in year-to-date mark-to-market profits. The iShares iBoxx $ Investment Grade Corporate Bond ETF, LQD, had the lion’s share of the profits with $48.6 million. With a duration of 8.22 years, more than double the other two corporate bond ETFs, its interest rate sensitivity is much more pronounced and the ETF was down 3.3% for the year compared to down 1.0% and down 0.9% for the JNK and HYG ETFs.
With a March Fed Funds Target increase a 100% probability according implied future’s pricing, we should see further weakness in corporate bonds, yields to rise and corporate bond ETF prices to drop. Long outflows should continue and short interest should increase as investors rebalance their portfolios in anticipation of the Fed raising rates.
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Managing Director Predictive Analytics, S3 Partners, LLC
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