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Fixed income ETFs shorted ahead of expected Fed rate hike
09 March 2017
Futures traders are fully convinced that the Federal Reserve will raise interest rates at its March 15th meeting.
Short sellers are hedging their interest rate exposure with
fixed income ETFs given the possibility of a March 15th Fed
Funds rate hike.
Data from S3 Partners shows three of the top five one week
increases in ETF short interest are fixed income based
Short interest in these three fixed income ETFs increased from
$6.4 billion at the end of February to $8.5 billion by March
This $2.1 billion of new short increase is a 33% jump in one
Meanwhile long ETF holders, who had increased their holdings
by an average of $396 million each week for the first two
months of 2017, sold $274 million of their fixed income ETF
holdings in the first week of March.
"If the Fed Funds implied probability of March 15th hike
remains above 95%, a relative certainty, short selling in these
three ETFs should continue," said Ihor Dusaniwsky, head of
research, S3 Partners.
Futures traders are fully convinced that the Federal Reserve
will raise interest rates at its March 15th meeting.
On Wednesday, Bloomberg's World Interest Rate Probability
reflected a 100% probability of a hike next week.
BlackRock’s HYG, - one of the most widely
used high yield bond ETFs - is nearing its
historical high of $5.5 billion set in November 2016 and
experts at S3 Partners should top that figure by over $1 to 2
billion if short demand continues at this rate.
"Traders are primarily using these fixed income ETFs as
hedges to their fixed income positions or dividend paying
equity positions that will lose value when the Federal Reserve
raises the Fed Funds rate," added Dusaniwsky.
"Short interest increased as the probability if the Fed move
increased, especially in the HYG."