Fixed income ETFs shorted ahead of expected Fed rate hike

Fixed income ETFs shorted ahead of expected Fed rate hike

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 ETFs. 

Short interest in these three fixed income ETFs increased from $6.4 billion at the end of February to $8.5 billion by March 7th.

This $2.1 billion of new short increase is a 33% jump in one week.

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.”