Shorts Target a Big High-Yield Bond ETF
This article was originally published on ETFTrends.com.
The SPDR Barclays High Yield Bond ETF (JNK) , the second-largest high-yield corporate bond exchange traded fund by assets, is attracting some bearish bets.
Bond investors have been dumping their exposure to the more riskier segment of the fixed-income market as U.S. Treasury yields reached a level that triggered a global sell-off. However, stocks have rebounded this week.
With yields on more conservative debt going up, traders view the yields on junk debt less as less attractive in comparison relative to the risk exposure. For example, JNK has a 5.68% 30-day SEC yield.
“Short interest as a percentage of shares outstanding on the SPDR Bloomberg Barclays High Yield Bond ETF, ticker JNK, surged to more than 30 percent Wednesday, according to data from IHS Markit Ltd. That’s about a threefold increase from January and the largest short position in the fund since 2010,” reports Bloomberg.
However, some bond market participants believe the recent pullback in high-yield debt was not all that surprising, particularly when noting how tight spreads had become. Short bets against JNK do not come cheap.
“It’s a costly wager considering the fund’s hefty price tag,” reports Bloomberg. “The ETF, which is managed by State Street Corp., has an implied dividend yield of 5.7 percent, which is how much those making the short bets have to pay lenders annually. So, for the shorts to break even, JNK would have to fall more than that amount over the course of a year. The fund posted a slight gain in 2017 and climbed 7.5 percent in 2016.”
JNK, which is more than a decade old, holds 950 junk bonds. The ETF's option-adjusted duration is just over 4.1 years. Duration measures a bond's sensitivity to changes in interest rates.
“It’s been a rough ride for the high-yield bond market of late, with the Bloomberg Barclays U.S. Corporate High-Yield Total Return Index falling 2 percent since the gauge’s high on Jan. 26. Last year, the index rose more than 7 percent as investors took persistently low interest rates and muted stock volatility as signals to pile into riskier assets,” according to Bloomberg.
For more information on the fixed-income market, visit our bond ETFs category.
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