My Leitner-Esque Moment

They’re back. I thought they had all given up, but like an old college buddy who’s going through a bad divorce and just needs a place to crash for a ‘few days,’ the corporate credit skeptics are a tough lot to shake.

This crew is a left-over remnant of the 2008 Great Financial Crisis. After watching the global financial system implode in a crisis that threatened to topple the entire world economy, there is a group of market participants who believe the next dislocation is right around the corner - only this time will be even worse given the increased debt levels. Although their views can be nuanced, usually they believe the market stresses from the last crisis will simply replay in a more dramatic fashion. In 2008 stocks fell, credit spreads exploded higher, VIX shot to the moon and sovereign long-dated bonds were the best asset to own by a long shot. Therefore at the hint of any trouble, they skedaddle to put on whichever part of this trade is most in fashion.

Over the past few weeks, with concerns about higher rates rattling the markets, speculators have flocked to shorting corporate fixed-income. I have created a custom index that is comprised of the total short interest of the most popular corporate credit ETFs.

Last week the short position ticked at a record high.

The most interesting part of this development? Although speculators are leaning heavily against credit, the spread versus governments is barely moving.

The fact that spreads are relatively stable means that most all of the recent decline in corporate bonds can be attributed to a rise in the “risk-free” rate and does not represent an increased worry about company specific credit.

Usually, I would write about positioning in the futures market, but since there is a not an easy way to trade corporate credit through futures, I will stay consistent and show the short position of government based fixed-income ETFs. This makes a much better comparison.

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Disclosure: None.

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Gary Anderson 8 months ago Contributor's comment

Fascinating article. I doubt if one would see this inversion of rates happening in a derivatives clearinghouse. Corporates are subject to haircuts. What would it take for clearinghouses to give haircuts to sovereign bonds and not to corporates? Seems kind of lunaticish. But it is interesting to think about.