This page has been archived and commenting is disabled.

A Sneak Preview Of The Tranching & Subordination Of Eurozone Government Bonds

Tyler Durden's picture




 

Greece: The kiss of death for pari passu

A sneak preview of the tranching & subordination of EZ government bonds

While we are aware of politicians' repeated vows about the uniqueness of the Greek case, we remain deeply skeptical. After all, hasn't it been a winning investment strategy to assume that the exact opposite of whatever Europe's elite says will become fact? The recently overheard and filmed conversation between Germany's and Portugal's finmins (http://t.co/iDA9HJPo) points in the direction of an imminent review of the Portuguese case and might be a harbinger of PSI, OSI etc à la Gréce. And why stop there? Why not relieve the Italians, Spaniards, Portuguese etc. of their troublesome load? Wouldn't it be nice to pull a Greek and finally make it for those pesky Maastricht criteria?

But regardless of one's view on the ongoing crisis, it makes perfect sense to go where no investor has gone before. We did the unthinkable, read the unreadable and made it back alive to tell the tale: we ploughed through all of the individual bond prospectuses of our favorite list of countries in peril and actually found a lot of useful information for the investor. Given that the sovereign bonds of the Eurozone used to be looked at as riskless assets, it is safe to assume that the exercise hasn't been done by a lot of investors on a regular basis. Judging by the difficulty to even obtain the information, both the interest of investors to obtain it and that of issuers and underwriters to provide it has been and remains extremely limited.

Countries we looked at:

Greece, Portugal, Italy, Austria, Hungary and Spain

Criteria we applied:

Governing law (local vs. foreign) and debt covenants.

Metrics we applied:

We compared yields or ASW levels of similar maturities, to account for the various currencies.

Conclusions we came to:

While there is already a significant markup for certain Greek government bonds that are issued under a foreign law jurisdiction (see Graph 1), there is no clear distinction in any of the other countries' bonds.

Graph 1

Table 1: Foreign Law bonds of Greece, Portugal, Italy, Austria, Hungary and Spain

Relative illiquidity and low issuance sizes distort yields and spreads. Investors traditionally shunned foreign law bonds and piled into local law issues. This may seem puzzling at first glance, given the duration and severity of the crisis. We attribute this to the investor base: their thinking remains entrenched in traditional categories, namely interest rate risk as opposed to credit risk. Only when the threshold is clearly crossed -as in the case of Greece- does duration-based pricing make way for default-based pricing and a different investor base takes over. When Greece lost its last IG rating, it disappeared from the universe of EZ government bond managers and entered the realm of HY bond investors. Thus credit criteria began to matter and were being priced in. In our view, the state of the crisis warrants a broad-based significant markup for investor-friendly prospectus language and we see trading opportunities in most of the countries we analysed.


Graph 2

No distinction yet- amazing, given the yield levels.

 

Graph 3

No visible distinction yet.

Graph 4

Some mispricings, else no distinction so far.

Graph 5

Small markup vs. HUF swap rates for the local bonds, FX bonds mostly trade north of HU CDS; given
the illiquidity and unreliability of BVAL pricing, the situation is
clouded.

Graph 6

Foreign law bonds receive no love from investors, yet.

Our general recommendation: Establish selective long/short pair trades in maturity-matched foreign/local bonds, or go long foreign law bonds and hedge via CDS.

 

- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Sun, 02/26/2012 - 15:53 | 2198456 GeneMarchbanks
GeneMarchbanks's picture

'Criteria we applied: Governing law (local vs. foreign) and debt covenants.'

That was your only but final mistake.

http://en.wikipedia.org/wiki/Calvin_ball#Calvinball

Purrdy charts though, bet you shelled out a pretty penny;)

Sun, 02/26/2012 - 16:06 | 2198483 Future Tense
Future Tense's picture

From Jim Sinclair.  He continues to believe there will be no credit event:

"I have gotten copies of many articles defining the Greek credit event as a default. None of them mean anything.

As far credit default swaps are concerned (the nuclear weapons of mass financial destruction), there is but one arbiter of default. That body is the International Swaps and Derivative Association.

Unless they declare a default there is no default that will turn credit default swap over the counter derivatives from notional value to full value"

Sun, 02/26/2012 - 16:30 | 2198543 Conrad Murray
Conrad Murray's picture

Interesting information on the International Swaps and Derivative Association:

http://www.isda.org/membership/isdamemberslist.pdf
http://www.isda.org/membership/ben_of_primary.html

Sun, 02/26/2012 - 16:43 | 2198576 cossack55
cossack55's picture

Wow. Just looking at the primaries makes me want to go long orange jumpsuit mfgs.

Sun, 02/26/2012 - 16:59 | 2198618 spiral_eyes
spiral_eyes's picture

Want to avoid all this debt bullcrap?

Nassim Taleb gave us the answer almost three years ago.

Equity-based lending.

http://azizonomics.com/2012/02/25/nassim-talebs-big-idea/ 

Sun, 02/26/2012 - 20:04 | 2199011 kaiserhoff
kaiserhoff's picture

HEDGE VIA CDS!  OH, MY EYES!

 

Please tell me he didn't just write that.  Why not just eat your shit sandwich straight-up, without the relish?

Sun, 02/26/2012 - 20:29 | 2199067 greased up deaf guy
greased up deaf guy's picture

"... go long foreign law bonds and hedge via CDS."

<facepalm>  the extended analysis wasn't even necessary if this is the recommendation.  a more apt recommendation would be to avoid this sh*tstorm altogether, but i suppose that would make too much sense and/or does nothing to appease all of the gamblers out there.

Sun, 02/26/2012 - 20:16 | 2199039 Schmuck Raker
Schmuck Raker's picture

Robert Shiller is espousing a similar idea for sovereigns...

Yves Smith thinks it's a "Deranged Idea".

Sun, 02/26/2012 - 16:37 | 2198550 Awakened Sheeple
Awakened Sheeple's picture

And if it is not declared a credit event, who in their right mind would buy PIGS debt without an effective hedge. On March 20, if the CDS trigger, the markets tank. If they don't, then pigs bonds and financials drop like a stone.

I'm long FEAR.

Sun, 02/26/2012 - 16:55 | 2198573 GeneMarchbanks
GeneMarchbanks's picture

Well you better get long stupidity cause if they 'trigger' they'll be stashed safely in some Canadian pension accounts as the bookies will have dispensed with them quickly, if not no 'trigger'.

A philosophical question as a bonus to meditate on: If a trigger goes off in the forest and nobody is around to 'announce' it, does it rattle the 'markets'?

Sun, 02/26/2012 - 17:47 | 2198713 Awakened Sheeple
Awakened Sheeple's picture

The question is, despite the collusion, has the bansters' web finally become so twisted that they can't manage it as they see fit. How do you paper over the insolvency of the western world indefinately? It cannot be done. We've had the black cloud of total economic collapse hanging over the "markets" for 4 years. How many times has the music almost stopped? If need be they will begin to cannibalize each other to keep the system going. The sheeple have already been fleeced.

Sun, 02/26/2012 - 17:11 | 2198645 hyperbole2000
hyperbole2000's picture

As as a techncal organization, the ISDA maintain and offer contract templates for CDS agreements. The agreements are private party to private party and give no decision making powers to the ISDA unless the ISDA is spelled out explicity in the contract documents as having such powers. Given that it is an ISDA template, there may be a such a standard clause in the contract. Conversley how many contracting parties have superceded such ISDA clauses with supplemental verbage that makes the ISDA irrelevent with respect to default declaration. Enquiring minds want to know?

Sun, 02/26/2012 - 16:27 | 2198531 earleflorida
earleflorida's picture

+ 100

Ps. I am the proud owner of "all" memorabilia, as are my children 

Sun, 02/26/2012 - 16:54 | 2198606 Ahmeexnal
Ahmeexnal's picture

Banker/politician heads in jars?

Sun, 02/26/2012 - 16:44 | 2198579 JohnG
JohnG's picture

 

 

Close.

Calvinball Rule 1.2 Any player may declare a new rule at any point in the game. The player may do this audibly or silently depending on what zone (Refer to Rule 1.5) the player is in.

Sun, 02/26/2012 - 18:51 | 2198862 WmMcK
WmMcK's picture

For less contemporary but equally enjoyable strips read Pogo.

Sun, 02/26/2012 - 18:52 | 2198865 Ghordius
Ghordius's picture

Never the same rules! Good one.

"and hedge via CDS" of course, how could I forget that sovereign bonds are worthless without CDSs.

Buy CDSs and your love life will improve dramatically. Honest.

Sun, 02/26/2012 - 21:49 | 2199216 lambretta
lambretta's picture

You may have mixed Australia in with Austria.  I notice that one of the Governing Law's you had was "New South Wales".  Sydney is the capital of New South Wales which in turn is a state of Australia.  Australia is some what different to Austria!

Third of the way down this table........ http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2012...

Sun, 02/26/2012 - 16:04 | 2198476 ebworthen
ebworthen's picture

Law?  What's that?

http://www.flickr.com/photos/expd/6300909415/

(hat-tip to WB7, a.k.a. "Colonel Flick")

Sun, 02/26/2012 - 16:54 | 2198607 jm
jm's picture

Good pair trade is Italy 5Y and NA.HY

 

Sun, 02/26/2012 - 17:01 | 2198612 Atomizer
Atomizer's picture

 

 

Obama: America, it’s time to grab your shovel. Everyone needs to pitch in by digging our way out of this tranche of quicksand. Our collective efforts will rebuild America by providing over 3 million new shovel ready jobs.

Collateralized Debt Obligation [goto 11]

http://academicearth.org/lectures/collateralized-debt-obligation

Sun, 02/26/2012 - 17:01 | 2198627 Poor Grogman
Poor Grogman's picture

What a great piece of research, well done!

Ahead of the pack AGAIN....

One can only feel a sense of sorrow as one observes the sheeple being fleeced yet again, shearing time approaches, while leaders vacillate.

Sun, 02/26/2012 - 17:23 | 2198670 slewie the pi-rat
slewie the pi-rat's picture

i was lucky to have learned about this here earlier from tyler and falak_p as the subordination issue emerged and the cac's came up around the liquidation roundTable...

Sun, 02/26/2012 - 17:39 | 2198702 dannyboy
dannyboy's picture

Looks like people are only just catching up to ZH in terms of subordination of EZ bond market, this was just a lame version of this ZH article.

Sun, 02/26/2012 - 18:01 | 2198740 q99x2
q99x2's picture

Every central bank shall be surounded by the devastation of their financial terror.

Sun, 02/26/2012 - 19:34 | 2198945 slewie the pi-rat
slewie the pi-rat's picture

they already are!

we keep picking up the tab for their shitheadedness, too!

they're doin waaaay better with their own criminality than we are!  we get foodStamps, the interstateHiwaySystem, and public transportation.  oh, and gas,electric,water,garbage,cable,republicans&democrats [for now]

they get everything else?    soon, we'll all be fighting like pie-rats over the shrinky-dinky-winky-winky-hedgie-wedgie

or, we'll just continue to "adjust" to this moronic pooopyDooopy and  carry on, BiCheZ!

Sun, 02/26/2012 - 18:18 | 2198782 lolmao500
lolmao500's picture

Here we go folks :

http://www.ynetnews.com/articles/0,7340,L-4194506,00.html

'US to announce aerial blockade on Syria'

US readies for possibility of intervention without UN resolution, Asharq Al-Awsat reports, citing US military official; plan to include humanitarian aid to Syrian refugees on Turkey's border

Sun, 02/26/2012 - 18:39 | 2198823 Awakened Sheeple
Awakened Sheeple's picture

Must have been leaked... There hasn't been any celebrity deaths or massive earthquakes this weekend.. Or are we saving that for the "intervention."

Sun, 02/26/2012 - 19:59 | 2198980 slewie the pi-rat
slewie the pi-rat's picture

actually, the bottom part of your paste/quote is a military interpretation of the actual action, which is, first&foremost, and aid-to-refugees situ/station @ the turkishBorder;  the situ will be policed byNatoForces (turkey is a member)

 PASTE (my emph) ::    Russia, China to join aid efforts?

 

According to Asharq Al-Awsat, the Pentagon does not anticipate a change of heart on the part of China or Russia, who have opposed foreign intervention or sanctions against Syria. But the US expects the two nations to join the humanitarian aid efforts, support a ceasefire between the Syrian regime and rebels and send special UN envoys to investigate the developments in the country.

YES!  this is gonna be done while china handles the arab groups involved and hosts the convention which will attempt to hammer out the ballot for the votes

my sense is that the syrian goobermint will cooperate and negotiate to avoid the noose, if possible, at this point, but who knows?  this is all arranged, already.  who shows up at the kofiAnan-co-chaired table and what they have to say?  stay tooned!  lQQks like china&TPTB may be hoping to hammer out a newConsitution or adjust the oldOne b4 the "popularUprising" which will be done thru the ballotBox, this time,or my mom is gonna freaking kill me!  L0L!!!

Sun, 02/26/2012 - 19:42 | 2198963 Caviar Emptor
Caviar Emptor's picture

We'll inflate our way out of it. Now go back to sleep. 

Sun, 02/26/2012 - 20:15 | 2199034 Hulk
Hulk's picture

I wasn't really sleeping, just restin my eyes...

Sun, 02/26/2012 - 21:01 | 2199132 tom a taxpayer
tom a taxpayer's picture

I wasn't really sleeping, just restin my eyes...

http://www.dailymail.co.uk/news/article-2106016/New-York-air-traffic-con...

Sun, 02/26/2012 - 21:04 | 2199140 Poor Grogman
Poor Grogman's picture

Inflation = higher oil prices = oil wars

Therefore [ inflation = war]

= Ponzi-cide (TM)

Mon, 02/27/2012 - 01:52 | 2199821 mimiss
mimiss's picture

Complete your basketball items jointly with your favored NBA team cap. The NBA store provides a broad range of NBA fitted hats bfgjafvbd
Atlanta Falcons Hats
Buffalo Bills Hats
Chicago Bears Hats
Cincinnati Bengals Hats
Cleveland Browns Hats
Dallas Cowboys Hats
Denver Broncos Hats
Detroit Lions Hats
Green Bay Packers Hats

Mon, 02/27/2012 - 08:24 | 2200051 mellons
mellons's picture

great piece- being a complete noob i approached a number of traders looking for specifics over the past few months to see under whick law (local or engish) specific issues of greek bonds were issued under. I was politely told that not only did they not have the details but that it was not normal practice to have same. I did not proceed as a result.

obviously from reading this

it was not as stupid a question as i had been led to believe....

Sat, 03/03/2012 - 00:57 | 2219155 q5251355
q5251355's picture

Mens Vibram FiveFingers and Womens Vibram Shoes was designed to reinvent the pleasure of 'barefooting.' It allows us to go back to the beginning, the way we were supposed to live. The moment we start using the Cheap Vibram Five Fingers to move bare feet, we experience a sudden resurge of a lot of abilities that we had lost due to years of forcing our body into unnatural movement. Gradually, we start to get back our original way of walking, the pain that we used to feel in our calf muscles or around our waist suddenly vanish, and most importantly we start feeling free and happy.

The Vibram FiveFingers Shoes from Vibram was originally designed to increase the potential and performance of runners, athletes, and other people involved in adventure sports. With admit importance of barefoot running, Five Fingers Shoes have promoted the culture of barefoot running, and now many athletes world over find the Five Fingers Vibram their best choice. The increased grip, steadiness and quickness offered by barefoot moving with five finger shoes is useful for many, who have to make quick reflex-based movements or tackle rough terrain, muddy waters, slippery sands, and the like. The Vibram Five Fingers have already become popular among people involved in climbing, fitness training, martial arts, light trekking, yoga, canyoneering, running, pilates, sailing, boating, kayaking, surfing, flats fishing, travel, and Canoeing.Vibram Five Fingers Sale from Five Fingers UK nline with big discount and fast delivery,better choice for you

All affordable Mulberry Bags make a survey of their very own; you'll come upon hand bags that fit each and every single kind of style personality and elegance. Take it for a rocking night out, every time you might be off to function or perhaps should you are out basically to satisfy track of buddies. With Mulberry Alexa bags that are generally in fashion you may by no means really feel outdated when it comes to manner and luxurious.

You are able to select out of your several colors of Mulberry Handbags that are trendy, the materials used are trustworthy and in addition excellent top quality in Mulberry Sale online store . This can make specific your Mulberry Bag lasts through differing several weeks. Group it along with any kind of clothing and they are positive to create the way record using their vogue, color and main top quality finish.Buy Mulberry Outlet from Mulberry Factory Shop will you save a lot of time and money because of the full collections available and big discount,and the same time trustful!

Mulberry Alexa Bags

Mulberry Bayswater Bags

Mulberry Briefcase Bags

Mulberry Clutch Bags

Mulberry Cross Body Bags

Mulberry Handbags

Mulberry Bayswater Holdalls Bag Black

Mulberry A Daria Clutch Bag Purse Black

Mulberry Alexa Holdalls Plum Bags

Mulberry Calf Leather Clutch Bag Purple

Mulberry Alexa Holdalls Oak Bag

Mulberry Hobo Bags

Mulberry Messenger Bags

Mulberry Shoulder Bags

http://www.alexabags2012.net

Sat, 03/03/2012 - 01:02 | 2219176 q5251355
q5251355's picture

Mens Vibram FiveFingers and Womens Vibram Shoes was designed to reinvent the pleasure of 'barefooting.' It allows us to go back to the beginning, the way we were supposed to live. The moment we start using the Cheap Vibram Five Fingers to move bare feet, we experience a sudden resurge of a lot of abilities that we had lost due to years of forcing our body into unnatural movement. Gradually, we start to get back our original way of walking, the pain that we used to feel in our calf muscles or around our waist suddenly vanish, and most importantly we start feeling free and happy.

The Vibram FiveFingers Shoes from Vibram was originally designed to increase the potential and performance of runners, athletes, and other people involved in adventure sports. With admit importance of barefoot running, Five Fingers Shoes have promoted the culture of barefoot running, and now many athletes world over find the Five Fingers Vibram their best choice. The increased grip, steadiness and quickness offered by barefoot moving with five finger shoes is useful for many, who have to make quick reflex-based movements or tackle rough terrain, muddy waters, slippery sands, and the like. The Vibram Five Fingers have already become popular among people involved in climbing, fitness training, martial arts, light trekking, yoga, canyoneering, running, pilates, sailing, boating, kayaking, surfing, flats fishing, travel, and Canoeing.Vibram Five Fingers Sale from Five Fingers UK nline with big discount and fast delivery,better choice for you

All affordable Mulberry Bags make a survey of their very own; you'll come upon hand bags that fit each and every single kind of style personality and elegance. Take it for a rocking night out, every time you might be off to function or perhaps should you are out basically to satisfy track of buddies. With Mulberry Alexa bags that are generally in fashion you may by no means really feel outdated when it comes to manner and luxurious.

You are able to select out of your several colors of Mulberry Handbags that are trendy, the materials used are trustworthy and in addition excellent top quality in Mulberry Sale online store . This can make specific your Mulberry Bag lasts through differing several weeks. Group it along with any kind of clothing and they are positive to create the way record using their vogue, color and main top quality finish.Buy Mulberry Outlet from Mulberry Factory Shop will you save a lot of time and money because of the full collections available and big discount,and the same time trustful!

Mulberry Alexa Bags

Mulberry Bayswater Bags

Mulberry Briefcase Bags

Mulberry Clutch Bags

Mulberry Cross Body Bags

Mulberry Handbags

Mulberry Bayswater Holdalls Bag Black

Mulberry A Daria Clutch Bag Purse Black

Mulberry Alexa Holdalls Plum Bags

Mulberry Calf Leather Clutch Bag Purple

Mulberry Alexa Holdalls Oak Bag

Mulberry Hobo Bags

Mulberry Messenger Bags

Mulberry Shoulder Bags

http://www.alexabags2012.net

Do NOT follow this link or you will be banned from the site!