Bearish bond investors are rushing for protection, fueling record options activity in two of the biggest corporate-bond ETFs.
Open interest for put contracts is close to all-time highs for both the $34 billion iShares iBoxx $ Investment Grade Corporate Bond exchange-traded fund (ticker LQD) and the $17 billion iShares iBoxx High Yield Corporate Bond ETF (HYG), according to data compiled by Bloomberg. Both funds have posted a barrage of outflows in recent days.
Cracks are beginning to spread in the corporate-bond market as expectations build that the Federal Reserve will have to tighten policy aggressively to control inflation. Treasury yields have rocketed higher in response, weighing on duration-sensitive corporate bonds and fueling concern that policy makers may cool price pressures at the expense of economic growth. Those fears were front and center on Thursday as showing the hottest consumer-price index print since the 1980s prompted traders to ramp up hike wagers.
“People are making a bet that credit right now is an asymmetric bet,” said Sameer Samana, Wells Fargo Investment Institute senior global market strategist. “If everything goes right, you get your coupon, but if the Fed makes a major mistake there’s quite a bit of room for spreads to widen out. We’re not in that camp, but that’s what those bets are saying.”
Both HYG and LQD dropped about 1% Thursday, extending this year’s losses.
This article was provided by Bloomberg News.