Junk-Bond Traders Pile Into Bearish Bets Ahead Of Fed/BoJ

After one the biggest rallies in the last seven years off the Feb lows, high-yield bond investors are rushing into bearish (hedge) positions ahead of this week's Fed/BoJ spectacle. Put volume (protecting downside) in the last few days has soared to levels only seen around Brexit and last December's Fed rate-hike as Bloomberg notes, investors have already become skittish on signs that global central banks may turn off the spigot.

HYG has seen a yuuge surge off the Feb lows…


But, as Bloomberg reports, a total of $4.8 billion of options in the iShares iBoxx High Yield Corporate Bond ETF traded last week, the highest volume since the week of June 27 after Britain voted to leave the European Union, according to data provided by BlackRock Inc. Of the 565,000 options contracts that changed hands, more than 85 percent were puts, according to Bloomberg data. By comparison, put options have accounted for about 64 percent of the total options trading in the ETF this year, Bloomberg data show.

The fund, which is known by the ticker HYG and has $15.2 billion in assets, has also experienced $1.3 billion in redemptions since Sept. 9.


Investors already have become skittish on signs that global central banks may turn off the spigot, according to a Sept. 15 report from Adrian Helfert at Amundi Smith Breeden. As Bloomerg adds, the broad selloff on Sept. 9 that preceded last week’s volatile trading was “simply the withdrawal symptoms of an addict unaccustomed to being denied his fix,” Helfert wrote in the report.

“The good news is that economy is now likely strong enough to allow the markets and companies to kick their dependence on a Fed whose accommodative stance now threatens to disable normal function,” he wrote.

But that hasn’t prevented investors from turning increasingly bearish about a junk-bond market that has delivered 14 percent gains this year. Short interest in HYG, which is a measure of the amount of shares borrowed to wager against the underlying securities, surged to a record $4.5 billion as of Sept. 15, according to estimates from financial analytics firm S3 Partners.

“If the high-yield default rate or Fed Funds rate increases, short sellers are poised to win big, but the cost in keeping their positions is getting more expensive,” Ihor Dusaniwsky, head of research at S3, said in an interview. “Shorts continued to build their positions as the probability of a fed funds rate increase diminished.”

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