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The Spanish 'Legal-Arbitrage' Bond Trade Is On

As subordination and the inevitable cram-down of European sovereign debt becomes increasingly clear, the 'legal-arbitrage' that we were first to point out back in January in our Subordination 101 post (which worked out extremely well for Greek PSI holdouts), is beginning to be priced into Spanish debt also. As we pointed out yesterday (here and here), being long non-local-law Spanish bonds against a short in a well-matched local-law Spanish bond offers significant upside should things start to get really-ugly (as opposed to the current just-ugly) in Europe. It seems obvious to us that, arbitrage aside, bond portfolio managers should be seeking out these non-local-law bonds and swapping into them (as part of their Fiduciary duty to their investors) if their mandates force them into owning Spanish bonds. In the meantime, as is clear from the chart below (and noted that liquidity/sourcing of the non-local-law bonds is tough but that's why you pay your bond broker so much) that the 'trade' or swap is beginning to be positioned (and especially the last two days where the non-local-law bond has actually risen in price as the local-law bond has crashed).



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"Uganda Is Not Spain"

Nobody can forget how over the weekend Spanish PM Rajoy told economy minister de Guindos to keep a stiff upper lip, and that, lest someone forget, Spain is not Uganda. Two days later nobody is laughing: Spanish bond yields just pushed to Euroarea records, Fitch just downgraded the bulk of Spanish banks, and it looks like Spain may need a second bailout before the details of the first one are even ironed out. However, one entity is not amused. Uganda. Or perhaps, is very amused, depending on one's perspective.



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Guest Post: The ‘Lesser Of Two Evils’ Con-Game

Lesser Of Two Evils?  There’s No Such Thing…

First of all, asserting that there is such a thing as a “lesser of two evils” is an act of naivety.  It relies on a very dangerous assumption; that one can somehow quantify which candidate is going to hurt the country less.  I’ve even read essays by people who pretend they can mathematically delineate the “more evil” of the evils!  Not surprisingly, their “logic” invariably leads them to proclaim the lesser evil to be the candidate of the party they happen to belong to.  Ignorant Republicans always see the Democrat as the greater evil, while ignorant Democrats always see the Republican as the ultimate monster. Here’s some math for you:  there are two candidates for President of the United States, one is a cannibalistic serial killer who plans to murder 20 more people with his own hands while in office.  The other is a cannibalistic serial killer who only plans to kill 19 innocents personally.  Which candidate do you support?

The correct answer is NEITHER.



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What Does European Credit Know That Stocks Don't?

European credit markets are near one-week wides, having tumbled dramatically since yesterday's open. Investment grade credit is leading the charge followed by senior financials as professional investors look for macro protection - we suspect ahead of this weekend's election. However, European equities are modestly higher from yesterday's close and remain higher than Friday's close. Credit markets had their own dead-cat-bounce at the open this morning but that has since faded significantly, so for now, as we have said again and again 'credit anticipates and equity confirms', it seems credit is seeing something a little less sanguine ahead for now. In the meantime, Spanish and Italian sovereign debt is pushing higher in yield (Spain +74bps from yesterday's open to euro-era record highs) and Swiss 2Y rates have hit a new record low at -36.6bps.



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"Due To The Current Market Environment In Europe", Saxo Bank Quadruples CHF Margins From 1% to 4%

Yesterday, Reuters royally spooked the market when it announced that Europe is in all seriousness considering full blown capital controls, including border halts and ATM closures. Subsequently, various European talking heads aggressively tried to talk down this latest development. However, overnight Saxo Bank appears to have focused on the former and not the latter, and sent out an email with the following key text: "Due to the current market environment in Europe, Saxo Bank is adjusting the margin requirement for Swiss Franc (CHF)." Specifically, the margin is going from 1% to 2% on June 14, to 4% on June 21. How soon until margins become so high that they effectively act as an FX trading prohibition- i.e., an implicit "capital control", and how long until all other exchanges get the memo next?



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Euro-Fatigue Storm Rising

The ongoing drama and chaos across Europe has seen the rise and spread of a number of 'extremist' anti-EMU and anti-bailout parties. As JPMorgan notes, the political consequences of reform fatigue are high. Many countries have seen the emergence of nationalist parties but only France, Italy, and Greece have parties advocating EMU withdrawal (for now). This is exactly what we discussed as likely to occur and was quantified here (and here) as inevitably leading to chaos, judged empirically, when austerity has been imposed.



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Spanish Bond Yields Hit 2012 Highs As Merkel Dismisses Eurobonds

Spanish bond yields have leaked slowly higher all day but the very recent news from Merkel, talking on the G-20, that:

*MERKEL SAYS WRONG TIME TO DISCUSS POSSIBILITY OF EURO BONDS
*MERKEL SAYS STATES MUST GIVE UP SOME SOVEREIGNTY TO EU
*MERKEL SAYS JOINT LIABILITIES IN EUROPE REQUIRE JOINT CONTROLS
*MERKEL SAYS INVESTORS' INTEREST NOT IDENTICAL WITH EUROPE'S (Subordination?)

has pushed Spanish CDS and bonds to they highest closing levels for the year and just shy of intraday post-EU record wides. For context, these are 15 year high yields at 6.67% and while they 'feel' dramatically high, Spanish bond yields were over 12% in 1995 (but the current spread to Bunds is dramatically wider) highlighting why focusing on the spread not the yield is now critical. 5Y CDS are holding above 600bps again (record wides) and 10Y Spanish spreads (over Bunds) are at 527bps - near all-time (pre- and post-Euro) wides. The last two days have seen a dramatic surge of 38bps from Friday's close and 65bps from Monday's open as Goldman's 'long' short-dated Spanish bond bet continues to Corzine the Muppets.



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Ahead Of Jamie Dimon's Senate Testimony, Who Knew What, When: The Full Infographic

One day ahead of Jamie Dimon's blockbuster appearance before the Senate Banking Committee, Bloomberg has released the definitive timeline infographic of who knew what, when, together with damning evidence that, contrary to what has been represented by JPM execs, the firm knew about the massive risk, which an in house risk manager described as "trying to land a Boeing 747 without flying lessons", as far back as 2010. Not only that but the firm was actively engaged in fudging its VaR for years in an attempt to hide the monster in the closet which we dubbed, long before the details were exposed, the "world's largest prop trading desk". Well, now the monster is out, and nobody wants to come within one bid/ask spread of it. And tomorrow, Jamie will have a fun time explaining just how he let all of this happen for years while potentially engaging in material 10(b)-5 fraud in his public filings and statements.



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Gold Deposits Of USD 1 Billion To Be Collected By Turkish Bank

Turkey remained the world's number one minter of gold coins in 2011. There is an increasing tendency for gold bars to be retail investors' vehicle of choice – although gold coins still retain a majority market share. Turkish people can pay in gold in certain foreign exchange houses and most jewellers will accept gold as payment. Turkish banks are is now offering digital gold saving accounts. Turkey expanded its gold reserves by 29.7 metric tons in April. Turkey’s bullion reserves climbed to 239.3 tons last month meaning that Turkey increased their gold reserves by 14% in April. The central bank on March 27 doubled the share of lira reserves banks can hold in gold to 20%, saying it would provide 6.1 billion liras ($3.3 billion) of extra liquidity. "This addition," the WGC says, "was the result of a policy change under which the central bank will now accept gold in reserve requirements from commercial banks to help the banks utilize their gold in managing their liquidity." Some analysts have suggested that the increase in Turkish gold reserves, as reported by the IMF, may actually be a form of “double accounting”. Whereby the gold held in Turkish banks client’s gold account is transferred from the local bank as a reserve to the central bank, from where it then figures as gold reserves.



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Import Prices Have Largest Drop Since October 09

MoM import prices met expectations with a significant drop and its largest drop in almost 2 years (after the prior drop was revised up to unchanged) but year-over-year saw import prices drop for the first time in 32 months. It seems energy prices were largely responsible as petroleum was down 4.2% MoM - the largest drop since May 2010. The price index for import fuels declined 3.9 percent over the past year after rising 43.7 percent for the year ended May 2011. The decline over the past year was the largest 12-month drop in fuel prices since the index fell 14.2 percent for the October 2008-09 period. Imports ex fuel inched lower -0.1% in May but despite this drop, imports prices for non-fuel imports rose 1.0% YoY. So it seems there is a little here for everyone but not enough for anyone.



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Greek Bank Run Update: €100-€500 Million Per Day

Five days ahead of the Greek parliamentary re-vote, the media propaganda machine has gone mute due to the moratorium on the RAND() known as popular polling: forgotten are the days when Syriza' popularity rating would swing from -100 to +100 in the span of hours, Diebold notwithstanding. Which leaves the media machine just one tactic: updates on the economic collapse as a tacit suggestion of what may happen if situation is not fixed. And while at this point it is nearly impossible to distinguish propaganda from fact, the latest numbers out of Kathimerini are just stunning. As Bloomberg's Marcus Bensasson reports, citing Kathimerini, the Greek banking system has continued to hemorrhage deposits this month, amid uncertainty over the outcome of elections on June 17. "Many people are putting money in shares of mutual funds denominated in dollars because of the bureaucratic difficulty of taking money out of Greece, or are keeping cash at home, the newspaper said." How much? "Deposits are leaving the banking system at a rate of 100 million to 500 million euros ($125 million to $625 million) a day, Kathimerini said, without specifying over how long a period that rate of outflow has continued."



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The Latest Adventures Of Alice In Euroland

With the Italian 10 year at a 6.15% and the Spanish 10 year at a 6.60% this morning; pause. My recommendation is to be out of all European sovereign and bank debt but if you have to own some because of your mandate or because you are attached to some Index then it is time to stop, look and listen. The Red Queen (Angela Merkel) and her minions are playing “off with their head” games and the situation is not a joke. The EFSF loans are going to be replaced by ESM money when the fund comes into existence and this means that your position as a senior bond holder will be subordinated to the IMF and/or the ESM. Any country including the existing troubled nations (Greece, Ireland, Portugal, Spain and shortly Cyprus) are going to have their debt replaced by the capital of the ESM so if you own any of these sovereign credits or any of their banks then you are going to be placed in a junior position by fiat. Then we have just seen what happens with “local law” bonds as demonstrated by Greece so that you need to swap out of any “local law” bonds ASAP and only own bonds governed by American, British or Swiss law. This would be for any and all nations on the Continent without exception. When it comes to bond holders versus taxpayers the taxpayer will always win so you must protect yourselves now rather than having your head handed to you later. There is no joy in finding your head on some silver platter I assure you and you must make the changes now and not later. I cannot stress this enough and I hope you are paying attention!



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Frontrunning: June 12

  • J.P. Morgan Knew of Risks: Warning Flags Raised Two Years Ago About CIO (WSJ)
  • Cyprus Poised to Seek Bailout within Days (FT)
  • U.S. Exempts India, South Korea From Iran Oil Sanctions (Bloomberg) - so those countries who need Iran crude?
  • Barroso Pushes EU Banking Union (FT)
  • Hollande Set for Poll Victory (FT)
  • Fed Says U.S. Wealth Fell 38.8% in 2007-2010 on Housing (Bloomberg)
  • Fed Officials Amplify Concerns over Europe (Reuters)
  • Fed's Lockhart Says Lower Yields Bolster Case for No New Action (Bloomberg)


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Spanish, Italian Bonds Continue Sliding As Risk Sees Modest Squeeze

Following yesterday's blistering market fall, the dead cat is in play, if only for a few hours like on Monday morning, precipitated by some aggressive short covering in the EURUSD, which will continue to be the primary buffer of every fall courtesy of the record number of net shorts, who cover on even the tiniest bit of pseudo-favorable news, no matter how ludicrous. As Bloomberg recaps, European markets gain led by telcos, utilities. Financials trade slightly higher having dropped earlier. Italian shares underperform. The euro reversed earlier losses against the dollar to trade stronger. Commodities fall led by natural gas, the GSCI index is off intraday lows. But the biggest data continues to be the action in Spanish, and now Italian, which everyone is watching very closely, bonds. As the charts below show, subordination is bad, bad thing, and one the Spandora's Box is opened, it can't be closed: both are substantially wider on the day, and the only potential buying catalyst would be for the ECB to come back into the market after 3 months of absence.



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