(Bloomberg) — Plunging oil prices have left options traders bracing for more losses in high-yield debt.

Options hedging against swings on an exchange-traded fund tracking the bonds cost the most since 2010 versus those on an ETF following Treasuries and were at an almost six-year high relative to contracts on a Standard & Poor’s 500 Index fund. Investors are weary of the debt after crude oil sank almost 50 percent since June given the high proportion of high-yield bonds from energy companies.

The junk ETF is heading for a second annual decline at a time when concern over the global economic recovery is underpinning demand for Treasuries.

“The recent fall in the oil price spooked investors and they’re now questioning if the shale oil-and-gas companies can survive,” said Peter Sleep, a senior money manager at Seven Investment Management LLP in London. His firm oversees more than $10 billion. “There’s been quite a selloff in U.S. high-yield ETFs. With such a substantial fall, volatility goes up, and the price of protection spikes.”

The iShares iBoxx $ High Yield Corporate Bond ETF, known by its ticker symbol HYG, is the largest junk-bond fund, with $14.5 billion in assets. The security lost 2.8 percent this year through Dec. 24 and reached a two-year low on Dec. 16. In contrast, the iShares 20+ Year Treasury Bond ETF has surged 22 percent, as yields on 30-year Treasury bonds, the most sensitive to the outlook for inflation, slid below 3 percent. The SPDR S&P 500 ETF Trust has gained almost 13 percent in 2014.

HYG rose 0.2 percent at 9:59 a.m. in New York.

Trading Surge

Trading of HYG options has jumped this month as oil’s bear market worsened amid a supply glut and geopolitical turmoil in the Middle East and Russia. About 56,000 bearish and bullish options changed hands daily on average in December, compared with an annual mean of less than 23,000 through the end of November, according to data compiled by Bloomberg.

Investors increased hedging with the slump in oil as the proportion of energy companies making up the high-yield debt market has ballooned. Since early 2010, they have raised $550 billion of new bonds and loans as the Federal Reserve held borrowing costs near zero, according to Deutsche Bank AG.

The average yield on junk debt has climbed and the outlook for defaults is still low, making some areas of the market still attractive, according to Regina Borromeo of Brandywine Global Investment Management LLC in London. She cited high-yield bonds with low correlation to oil prices.

Losses Recouped

Junk-debt investors recouped some losses last week after the Fed said it will be patient on the timing of the first interest-rate increase since 2006. In the three days through Dec. 19, HYG jumped 3.8 percent, the most since November 2011, while the risk premium on a credit-default swaps benchmark gauge tied to the debt of speculative-grade companies tumbled.

“There seems to be too much negativity in the market and that is why you saw a big snapback,” said Borromeo, a fixed-income portfolio manager at Brandywine. “Unless there is some geopolitical headline coming from Russia, I’d expect the U.S. high-yield market to probably rally through year-end.”

Short bets have fallen to 6.6 percent of HYG shares outstanding, down from 20 percent in April, according to Markit data. They dropped to as low as 5.1 percent in October.

That hasn’t prevented traders from taking money out of HYG. The ETF is poised for its first back-to-back annual decline in assets since its 2007 inception. Investors have pulled more than $267 million from the fund this year, after about $841 million flowed out in 2013, data compiled by Bloomberg show.

“I would be much more careful with U.S. high yield,” said Gunther Westen, who helps oversee about $30 billion as head of asset allocation and fund management at Meriten Investment Management GmbH in Dusseldorf, Germany. “Picking the right names is much more important. It always is in the bond sector, but now even more so.”

To contact the reporters on this story: Inyoung Hwang in London at ihwang7@bloomberg.net ; Jonathan Morgan in Frankfurt at jmorgan157@bloomberg.net

To contact the editors responsible for this story: Cecile Vannucci at cvannucci1@bloomberg.net Alan Soughley