Some traders looking to hedge risks in the high yield bond market, amid fears that an avalanche of Trump administration tariffs could push the U.S. economy into recession, turned to options on exchange-traded funds on Thursday.
A series of put option trades were booked Thursday in the iShares iBoxx High Yield Corporate Bond ETF (HYG) that would rise in value if the junk bond market deteriorates. The ETF’s implied volatility and put skew rose to multi-month highs as investors paid up for bearish bets.
Alex Coffey, a senior trading strategist at The Charles Schwab Corporation, said buying puts on the HYG is a “recessionary” and “negative growth” trade. The credit market has been slow to incorporate the impact of tariffs on bond defaults, according to Coffey.
“One of the interesting features of the current market is how much tighter credit spreads have been than you would expect.”
In one of the trades, an investor spent $3.6 million on put spreads allowing them to sell ten million shares of ETF at $76 by mid-May, while capping protection at $72. Another 130,000 May $75 puts traded, with at least 100,000 of them bought, according to market participants.
The total number of puts traded reached 1.56 million, the second-highest volume after March 13. HYG shares fell 1.2% to $77.87 on Thursday.
Traders looking to hedge credit risk can use derivatives on the ETFs, rather than using the over-the counter credit default swaps that because notorious during the 2008 financial crisis. On Thursday, trading in Cboe Global Markets’ High Yield Corporate Bond Index Futures hit a record open interest of $816 million in notional value.
Other market watchers agreed that the trade made sense as a precautionary hedge against credit spreads blowing out.
The trade was likely made by a fixed income investor nervous about credit default risk, according to Steve Sosnick, chief strategist at Interactive Brokers.
“It’s somebody with a portfolio of high yield securities,” Sosnick said. He said that the puts on HYG were the “simplest way” to hedge the risk of borrowers defaulting on their bonds.
“If you’re expecting an economic slowdown, it completely fits.”
--With assistance from Natalia Kniazhevich.
©2025 Bloomberg L.P.
