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Aug 24, 2020

Investors are ramping up bets against bonds in the ETF market

Smart money is betting heavily against bonds : Technical analyst

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With yields stuck at record lows, the love affair with all things fixed-income appears to be cooling in at least one corner of the market.

Investors have wagered more than US$1.5 billion against exchange-traded funds tracking bonds in the past week, according to a report from financial analytics firm S3 Partners. Five of the 10 most-shorted ETFs in the period were fixed-income funds, it found.

The US$57 billion iShares iBoxx $ Investment Grade Corporate Bond ETF, ticker LQD, saw the second-biggest increase in bearish bets from more than 2,000 funds tracked by S3, with traders newly shorting US$544 million worth of shares. The US$20 billion iShares 7-10 Year Treasury Bond ETF, ticker IEF, ranked third, with US$381 million in fresh shorts.

The week delivered “a marked increase in fixed income short selling,” wrote Ihor Dusaniwsky, head of predictive analytics at S3. “Short sellers may be thinking that the yield curve has bottomed out in the short term and may be trending higher, causing the prices of the ETFs bond holdings to decline.”

The wagers could represent some healthy hedging on long positions, rather than outright bearishness on bonds. The Federal Reserve remains prepared to buy more ETFs, after the announcement in March of its intention to enter the market sparked record inflows.

LQD -- which has absorbed the bulk of the Fed’s buying -- has climbed 19 per cent since March 23, but has fallen roughly 1.2 per cent over the past month.

Fixed-income ETFs attracted US$4.2 billion worth of inflows in the past week, led by LQD’s US$637 million haul. However, demand wavered elsewhere, and U.S. high-yield bond mutual funds posted the first outflow since July.