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How To Be Aggressively Bearish On Junk Bonds

How To Be Aggressively Bearish On Junk Bonds

Traders are bearish on high-yield corporate debt exchange traded funds (ETFs). Data confirm as much. For the week ended Feb. 27th, investors have yanked $171.3 million from the iShares iBoxx $ High Yield Corporate Bond ETF (NYSE: HYG), the largest junk bond ETF.

Only six ETFs saw larger outflows over that period than did HYG. Year-to-date, the SPDR Bloomberg Barclays High Yield Bond ETF (NYSE: JNK) and HYG have bled $3.43 billion and $2.81 billion, respectively. That places JNK and HYG sixth and eighth among US-listed ETFs in terms of 2018 outflows.

Data suggest traders are not relenting when it comes to shorting junk bond ETFs. Those bearish views could mean opportunity with the Direxion Daily High Yield Bear 2X Shares (NYSE: HYDD).

What The Data Say

For HYG and JNK, bearish trading data points are mounting.

“Short interest as a percentage of shares outstanding on the $15 billion iShares iBoxx $ High Yield Corporate Bond ETF, ticker HYG, hit an all-time high of 29 percent Monday, Markit data show,” reports Bloomberg. “Add elevated shorts on the SPDR Bloomberg Barclays High Yield Bond ETF, ticker JNK, in concert with a European counterpart, and bearish sentiment has piled up even as junk-bond spreads recover from the selloff earlier this month.”

HYG and JNK lost an average of 1.65 percent in February while HYDD posted a February gain of 3.4 percent. HYDD attempts to deliver double the daily inverse performance of the Bloomberg Barclays US High Yield Very Liquid Index, according to Direxion.

More On HYDD

HYDD's underlying index “includes bonds that have a remaining maturity of at least one year, are rated high-yield (Ba1/BB+/BB+ or below) using the middle rating of Moody’s, Fitch or Standard & Poor’s, respectively, and have $500 million or more of outstanding face value,” according to Direxion.

Nearly 22.5 percent of the index's holdings are issued by communications firms while over 30 percent hail from the two consumer sectors.

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