A Junk Bond ETF was an easy target for bearish options traders

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JInvestors are betting on further weakness in the high-yield bond market, taking an increasingly bearish stance in an exchange-traded fund tied to speculative-grade junk bonds.

The $14.3 billion iShares iBoxx $ High Yield Corp Bond ETF (NYSEArca: HYG) saw nearly 994,000 put contracts traded on Wednesday, according to Bloomberg data, reflecting the third largest daily volume of bearish contracts since March 2020 and more than double the 20-day average of HYG for put options.

The iShares iBoxx $High Yield Corp Bond ETF was also among the most popular ETF plays over the past week, attracting around $900 million in net inflows, according to data from VettaFi. However, part of the increase in inflows can be attributed to short-term interest as traders borrow stocks.

The sudden increase in demand for HYG downside protection reflects traders “resetting hedges” after last week’s rally as many remain confident the Federal Reserve will maintain its hawkish monetary policy outlook, Charlie McElligott says from Nomura Holdings to Bloomberg.

As markets began to mull over the possibility of the central bank suspending rate hikes as soon as September last week, swaps in the options market revealed traders were wide betting on three consecutive half-a-half rate hikes. -point to come. Since HYG’s realized volatility remains relatively low, McElligott argued that the ETF is an inexpensive way for traders to hedge the impact of tighter monetary policy on corporate credit.

“There’s still a feeling of another shoe to drop the September break is a total hoax,” McElligott said. “Hawkishness is not only reiterated here, but in Canada and Europe. Couple this with the onset of quantitative tightening and the perceived impact it can have on spread products like credit, this continues to be a favorite “cheap” hedge.

Riskier corporate credit remains out of favor in the context of continuously rising interest rates. More than $60 billion has flooded fixed-income ETFs so far this year, but nearly $11 billion has flowed out of high-yield funds, according to Bloomberg data.

For more news, insights and strategy, visit VettaFi.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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