Short interest in the largest investment-grade corporate bond exchange traded fund has reached record levels, reflecting increased bearish short-term bets on the credit market.
The bearish signal in the corporate debt category is a measure of investor sales of shares that they do not hold in the believe that bond prices will fall and they can repurchase the shares at a later date for a lower price.
Some fund managers argue that the increase in short interest reflects investors’ desire to seek a hedge in their corporate debt exposure, the Financial Times reports.
Short interest rose almost 50% to 11.4 million shares in the two weeks ended September 15 for the iShares iBoxx $ Investment Grade Corporate Bond ETF (NYSEArca: LQD). Short interest in the iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG) also remained near record high.
Matt Tucker, head of fixed income strategy for iShares in the Americas, said that it was “unclear” if the rise in short interest was “to create an outright short in the market or to hedge an existing position.”
The rising bearish sentiment may come from expectations that the market could pullback after rallying this year. Investment-grade bonds have returned about 9.5% and U.S. junk-rated corporate debt advanced 14.5% so far this year.
“The levels are unjustifiable,” Jack Flaherty, a portfolio manager with asset manager GAM, said of the prices of some high-yield debt. “We’re not playing in nine out of 10 deals.”
Corporate debt funds have experienced billions in net inflows since the U.S. Federal Reserve left rates unchanged. Some observers argued that the inflows reflected the renewed interest in corporate debt after the prospect of a delayed tighter monetary policy. Meanwhile, loose monetary policies abroad, including a bond-purchasing program out of the European Central Bank and Japan, have pushed foreign investors to the relatively more attractive U.S. securities, which provide much better yields in an environment where almost $13 trillion in global Treasuries trades with a negative yield.
“High yield continues to shrug off negative news even as many participants believe the market is overbought,” John Dixon, a junk bond trader at Clearview Trading, told the FT.
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