Short bets against high-yield-bond exchange-traded funds have turned into Daisy Dukes.
BlackRock Inc.'s iShares iBoxx High Yield Corporate Bond ETF (HYG) and the State Street SDPR Barclays High Yield Bond ETF (JNK) had 8% and 9% of shares on loan to short sellers, respectively, as of Monday, the Financial Times reported. That's the highest level of shorts against the two largest junk bond ETFs since October 2007, according to the FT.
Both ETFs, which have a combined $27 billion in assets, have seen money exit so far this year.
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Investors have pulled approximately $1 billion from them year-to-date through March 5, according to IndexUniverse LLC. Last year, they combined to take in $7.5 billion of net inflows.
High-yield bonds have enjoyed a remarkable run since the financial crisis as investors have sought their relatively attractive yields. Over the past five years, both the iShares and SPDR high-yield-bond ETFs have had annualized returns of more than 8%, handily topping the S&P 500's 5% annualized return over the same period.
Sentiment has slowly been turning against them though, as the run-up in prices has led to expectations of lower returns. The average high-yield-bond yield fell to a record low 5.62% in January.
Pimco's Bill Gross warned investors earlier this month to lower their expectations for future high-yield bond returns.
“Corporate credit and high-yield bonds are somewhat exuberantly and irrationally priced. Spreads are tight, corporate profit margins are at record peaks with room to fall and the economy is still fragile,” Mr. Gross wrote in his latest investment commentary.
“Recent double-digit returns are unlikely to be replicated, and when today's 5% to 6% high-yield interest rates are adjusted for future defaults and recovery values, 3% to 4% realized returns are the likely outcome,” he wrote.
So far, his prediction looks accurate. The two high-yield ETFs have returned less than 1% this year through March 5.
