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Goldman Closes Spanish 5 Year Bond Long Trade Recommendation

Submitted by Tyler Durden on 03/08/2013 12:24 -0400

From Goldman's Fracnesco Garzarelli:

Trade Update: Closing our 2013 Top Trade recommendation to go Long 5-year Spanish Government Bonds, for a potential 5.5% total period return

We recommend closing long positions in 5-year Spanish bonds, one of our Top Trade recommendations for 2013. Since inception on 6 December, the position would have returned 5.5%.

On 6 December 2012, we recommended going long Spanish 5-year government bonds (SPGB 5 ½ 30-July-17 – the 5-year generic at the time), with an initial target of 3.50%. On January 11, the yield fell below 3.50% and we extended the target to 3.00%. Since inception, the 5-year Spain has rallied 111bp, from an initial yield of 4.29% to 3.18% currently (mid-market).

Our decision to close our trade recommendation now is motivated by the following two main reasons:

First and foremost, we are very close to our (extended) 3% yield target. Our model calculations based on Spain’s current economic and fiscal consensus projections in relation to Germany’s indicate that 5-year bonds are fairly valued. From here, further scope for a decline in yields is down to a more material improvement specifically in the domestic growth outlook. This remains very possible given the negative skew in the distribution of GDP forecasts, in our view. But it has not yet been reflected in analysts’ forecast revision dynamics.
Second, Spain has outperformed Italy since the start of the year, and bonds have held up remarkably well in the face of political uncertainty in the latter. This is a testament to the divergence in relative positioning between the two markets – one of the factors underpinning our preference for Spain. In the coming two weeks, negotiations towards the formation of a new government in Italy will intensify. Although our baseline case remains positive, the market is locally vulnerable to headline risks.

Along with a view that Treasury yields would increase towards 2.25%-2.50%, reflecting an improving economic outlook and a relaxation of the Euro area risk premium, a convergence in intra-EMU government bond yield spreads represents one of our top conviction calls in the macro rates space for 2013. We continue to believe in both market dynamics, and will continue to explore and recommend ways of capitalising on them.

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Fri, 03/08/2013 - 12:25 | 3312359 SilverDoctors

Time to go long the Euro and Spanish debt

http://www.silverdoctors.com/

Fri, 03/08/2013 - 12:25 | 3312360 SheepDog-One

Line up the muppets for the slaughter!

Fri, 03/08/2013 - 12:26 | 3312361 whatsinaname

Goldman is saying overweight on commodities for next 3 months .. find that hard to believe considering whats happening in the FX markets eh ?

http://finance.yahoo.com/news/goldman-raises-3-month-forecast-104425580....

Fri, 03/08/2013 - 12:28 | 3312370 ekm

Few months ago somebody told me here that he noticed that Deutsche Bank Securities bought a truck load of spanish bonds.

We just found out who was the seller.

Fri, 03/08/2013 - 12:33 | 3312394 ziggy59

Muppetopia

Fri, 03/08/2013 - 12:36 | 3312395 fonzannoon

ekm what was your thoughts on whether the securities arm of a PD could take down the parent company or not?

edit - I would tell you this ekm. I think Germany would let spain default before they let DB go. DB is their JP Morgan. I just don't see it.

Fri, 03/08/2013 - 12:40 | 3312413 ekm

Have not discovered the legalities yet. There's not much on the internet.

However, I can tell you that there is no way in hell, no freaking way that the canadian gov would allow CIBC, RBC and BMO create separate entities as primary dealers in 2011, without ASSURANCES that those wouldn't bring down the parent companies.

If they did, Canada would be done, period, destroyed, financially.

We have only 6 banks here, that's it, 6 banks. The gov controls them very tightly.

Fri, 03/08/2013 - 12:47 | 3312428 Ghordius

nowadays it's either tight control of government by the banks or tight control of banks by the government - Canada seems according to your words to be in the same camp as continental europeans

Fri, 03/08/2013 - 13:01 | 3312470 ekm

Headquarters are all located withing few minutes from each other in Toronto downtown.

The reason: So the gov can control them all at once.

Fri, 03/08/2013 - 12:37 | 3312401 adr

So tomorrow we learn that Spain will add an extra month to the year for 10% YoY GDP growth causing all those who short the Spanish long bond to run for cover?

Fri, 03/08/2013 - 12:37 | 3312403 Abraxas