While the supposed common-knowledge is that rising short-interest is where to look for epic squeezes (and indeed it appears to the case in individual stocks); in ETF-land, it tends to be the opposite (especially when the underlying of the ETF is relatively illiquid). Absolute short interest in the high-yield bond ETF HYG is at a record - surging to over 23mm shares - heralded by many as evidence that HY can squeeze higher. However, given the incredible rise in shares outstanding in HYG (as flows drove creation until around six months ago) the more reliable indication is the short-interest-ratio. The SI ratio is back at the same levels it was at the highs of the Oct 2007 period - we humbly suggest that this (as was clear in 2007) is anything but contrarian as professional bond managers using ETF liquidity to hedge their over-stuffed and over-flowing illiquid HY bond portfolios. With HY 'yields' at record lows, HY spreads near record lows (and crossover having only been tighter during 1946-65 repression), leverage rising notably, and valuations extreme (only 22% of CCC credits priced with yields over 10%!!!) is it any wonder that the professionals are as confidently hedged as they were as the credit crisis exploded and Lehman struck.
HYG's Short-Interest ratio is at the same levels it was at the top of the last credit cycle as professionals use the simple and cheap liquidity of the ETF to manage risk...
[9]
As HY Spreads close in on record tights...
[10]
and crossover spreads are back at 'average' levels only helped by the last repression...
[11]
As valuations are 'incredible' with CCCs (the best performer of the year so far) now with only 22% of names sporting a yield above 10%!!!
Even as leverage surge...
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and of course HYG has deviated from its risk-on relationship with stocks - something that cannot last long given the cyclical impact of higher funding costs and structural impact on WACC...
[13]
Charts: Bloomberg, Morgan Stanley, Barclays