Demand to borrow funds that track junk-bond indexes reach $7 billion, the highest ever recorded, according to market research firm IHS Markit and as reported by CNBC. The surge in popularity for this particular type of exchange-traded fund (ETF) is a key metric in determining short interest, suggesting that investors are pulling their money out of junk funds, deciding to bet against the vehicles instead.
"Demand remains elevated despite a rally off the lows, which recovered half of the year-to-date (YTD) losses for the products," said IHS Markit analyst Sam Pierson in a research note.
Two Most Popular Junk Fund Offerings Have Suffered
The iShares iBoxx $ High Yield Corporate Bond fund (HYG), a popular ETF that tracks an index of junk bonds, gained about 16% from a low reached in February 2016 to July 2017. The ETF has lost 3.2% of its value in 2018. Its average annual return over the past five years is about 3.5%. The Bank of America Merrill Lynch high-yield gauge has spiked as much as 55 basis points YTD. Given bond yields and prices move in opposing directions, the group has suffered significant capital losses in the recent period.
As rising bond yields have drastically reduced demand for junk funds, investors have been cashing in on their investments. The two most popular junk fund offerings, the iShares high-yield product and the SPDR Bloomberg Barclays High Yield Bond ETF (JNK), have seen a total of $6.3 billion in withdrawals so far this year, according to CNBC. The money has been reallocated to borrowing to short sell the space, wherein borrowers lend the ETFs to others and then profit off the difference in price at a future date.
"The ability to achieve HY [high-yield] short exposure via exchange listed products has allowed a wider range of market participants to put the trade on, and has contributed to rising demand for the underlying HY corporate bonds, which is also at a post-crisis high," stated the IHS Markit analyst. Pierson added that corporate energy corporate bonds in the high-yield space are at currently the most sought after in the segment. (See also: Tariff Talk May Signal NAFTA Exit: Goldman Sachs.)