Traders are going all-in on the best new year rally in U.S. junk bonds since 2009, cutting hedges that help cushion nasty shocks like hawkish monetary moves and weak corporate earnings.

At-the-money implied volatility in the $14.9 billion iShares iBoxx High Yield Corporate Bond ETF has more than halved since the December maelstrom and now sits below historic averages. The options are so cheap Macro Risk Advisors recommends protective hedges, reversing a call in November to sell them.

While a resurgence in risk appetite and benign technicals have powered a 4.9 percent return this year alone, the rally’s staying power is in question.

“When we see markets rally aggressively we are likely to reduce our risks in those markets, such as the high-yield market this year,” said Jim Schaeffer, deputy chief investment officer at Aegon Asset Management. “When there’s such a strong rally, it doesn’t take much market noise to slow it down or stop it.”

Call it bullish conviction, a lack of fear, or greed -- it’s a stiff reversal from December, when selling volatility proved more profitable than shorting the same in Invesco’s loan ETF, according to MRA.

The relationship has come back to normal, showing that traders remain more worried about leveraged loans -- which have been hit by outflows this year -- than high yield.

Implied volatility in the biggest passive fund tracking the loan sector remains elevated relative to historic swings, spurring MRA to recommend selling put spreads on the ETF to pocket the premium.

Monetizing Mania

Hedge funds have made a killing fading bear and bull cycles. In the grip of last year’s meltdown, Greece-based Credence Capital, the volatility-trading arm of KM Cube Asset Management, sold put options on HYG -- a trade vindicated by the swift return to market calm.

Right now, put open interest in HYG is elevated but bearish demand hasn’t been enough to push up at-the-money implied volatility, and outstanding contracts could also reflect bullish selling.

And while implied volatility for out-of-the money puts has increased “slightly” over the past week versus at-the-money options, it doesn’t suggest downside protection is “being bought at an aggressive clip,” according to MRA strategist Vinay Viswanathan.

In other words, demand for hedges is decidedly muted even as investment banks including Morgan Stanley and HSBC Holdings Plc warn the lovefest for balance-sheet risk won’t last.

It’s “a claw back of the losses suffered late last year rather than the start of a sustainable bull run,” HSBC strategists led by Edward Marrinan wrote in a note. “We are reluctant to chase this rally, particularly as it has rendered dollar-credit valuations even less attractive” relative to threats that include trade, earnings and higher borrowing costs, they concluded.