I’ve said this before and I’ll say it again: if you’re a retail investor and you’re long high yield through popular ETFs, it’s probably not a good sign when you see the pros increasingly expressing their own longs via CDS while simultaneously shorting the ETFs you’re in.
And that’s exactly what looks to be going on in HY right now. No one wants to miss out on the last few basis points of spread compression but at the same time, no one wants to end up getting stuck long in illiquid cash markets when the tide finally turns.
So they’re selling protection on the most liquid thing they can find (i.e. hoping to squeeze a little but more out of the rally) while shorting the most illiquid thing they can find (HY ETFs).
Here’s the CDX side of it:
And here’s the ETF shorts:
I mean I guess there are other ways to interpret that juxtaposition, but I’m going with Occam’s razor on this one.
Additionally, as Bloomberg notes, “BlackRock Inc.’s iShares iBoxx High-Yield Corporate Bond ETF, symbol HYG, the biggest ETF focused on speculative-grade debt, suffered $1.5 billion of outflows in May, the most in a year.”
It’s pretty much the same story in JNK.
If you’re still hanging around in HYG and JNK please do remember what we’ve said over and over: these things are a liquidity mismatched nightmare. These funds are telling you that you’ve got daily liquidity but they’ve invested your money in assets that are not liquid.
On that note, we’ll leave you with two quotes, one from Mohamed El-Erian and one from Bill Blain.
The biggest unknowable is that you have the delusion of liquidity. You have people who promise overnight liquidity that have taken quite illiquid positions, particularly lending to various entities. As long as the party continues that’s fine, but should this liquidity be tested it’s not going to be as deep as people think.
The liquidity implications of the amount of cash tied up in ETFs are dimly understood. The amount of passive money is scary. Folks might just want it back sometime.