Pick The Subordinated Bond Out

Tyler Durden's picture

Something interesting happened on the way to the detail-free bailout of Spain's insolvent banking system (which may or may not see senior bond impairments depending on just how big of a capitalization hole the ECB, not some fringe blog, sees). We got details. To wit, from Dow Jones:

The European Union loan to Spain will have a 30-year maturity, an interest rate of 2.5% and a 10-year grace period, reports ABC in its Monday Internet edition, without citing any sources.


The EU has offered to lend up to EUR100 billion to Spain, but the definite figure and the final details of the EU aid won't be known until July 20, when a final bailout agreement is expected to be signed off by EU finance ministers.

Now here's the thing: anyone who has ever looked at a balance sheet, and actually happens to be familiar with terms such as priority, seniority, guarantee, and subordination, will notice something rather peculiar. Namely that only idiots of the nth degree will claim that a 30 year 2.5% bond is pari passu, or equal in right of subordination - precisely what those unelected technocrats in Europe have been repeating day after day since various European summits - with a 10 year at 7%, which is where the Spanish debt actually clears the market. In other words, sorry - there is something here which gives the bailout debt implied seniority.  And here is the punchline: if the Spanish bailout debt does not trade like a pari passu piece of debt, it means that it is... i) not pari passu, and that it is ii) priming, no matter what any so-called pundit with a newsletter to peddle, may claim otherwise. Period. End of Story.

Or in other words: spot the subordinated bond out:

  • 10 Year at 7%, or
  • 30 Year at 2.5%

Take your time. We have all the time that's left in the future of the Eurozone... and then some.

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Michael's picture
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1000pips's picture

The bond 'yield' is not important.  It's the timing of the annoucment which changes everything.  Europe is about to do a massive PR job on the world.  It's called the Olympics, no one but us on Zero give a shit about the true conditions in the global economy.  The fact is, we are such a minority that we can't even have a semi-intellegent conversation about these topics with any of our friends or families.  Thank's to zero hedge we can be together during this horrible time...

So, how do we profit from these idoit EU politicians?  Sure we can by physical, but that's a crisis preparation-and all should hold a fair amount...but the EURO, yes, the seemingly dead EURO-that's where the profit is going to be-and fast; they (the MSM, the EU Politicians-INCLUDING GERMANY), are going to hype these deals super fast and super hard.  And the short's are going to get so overwhelmed in the sqeeze that the thing could ramp to $1.30 before the Olympics are over.  

The old, 'we shall over come' message, along with a few positive words out of Bernake's and Merkel's mouth and this war is over-temporarily.  

Trade accordingly-long the EURO/USD, might as well get rich right now; they can do this for years...


vast-dom's picture

Why not just extend 0.01% at 30 year (a la Bernankzi). And then in a few months go NIRP and have the Spaniards make a little euro scratch off the loan, off of, caeteris paribus, Germany's back of course.

Goldilocks's picture


Paul "King" Krugman knocked off his Ivory Tower as Fools Sack the Hill!
http://www.youtube.com/watch?v=QsDX5TW_q34 (28:04)

Lauren Lyster takes Wall Street's Bull by the Horns - Infiltrates the Trading Floor!
http://www.youtube.com/watch?v=J5QBwtQa_Kk (27:52)

Web Extra Chris Whalen: Is JP Morgan blowing hot air with clawbacks? Plus, Natural Gas forecasts
http://www.youtube.com/watch?v=jRCJTbSA4io (5:01)

Jim Grant on Safe-Haven Bubbles and a Bull Market in Black Walnut Trees!
http://www.youtube.com/watch?v=Mr-JHFmYT3o (28:04)

Web Extra: Jim Grant on JPMorgan's Clawback Proposal and the Quest for Accountability
http://www.youtube.com/watch?v=6wi8me6bD5g (3:24)

El Oregonian's picture

Are commie links all that you link to?

jeff montanye's picture

jim grant's red bow tie was the tell.

indygo55's picture

OMG this shit is so last night! We are now on a hour by hour info train Bitchez!

bigdumbnugly's picture

pari passu


is that something to do with women in the capital of france?

very politically incorrect i must say

HurricaneSeason's picture

Yeah, it means hotel maid.  Dominique Strauss-Kahn has some pari passu.

Bullish Bear's picture

If they repeat the lies enough times maybe they'll become true...


or maybe not.

ghengis86's picture

Wait...."our" 30 year is at 2.58%. I'm not sure I have any clue as to what the fuck is going...

Cabreado's picture

Panic and "creativity" in the bowels of the beast.

Dr. Engali's picture

Our 30 year is only trading at that level because a man with a very large printer is buying at that level. That and every entity that hedges by trading the ever flattening yield curve .....ahem insurance companies..... are being forced to extend their duration. Which ,by the way, will totally fuck them if Ben stops buying and let's the market have their way.

bigkahuna's picture

They -Timmay and Benny- can only hold it back so long. Eventually they'll be swamped and the fit is gonna hit the shan.

ebworthen's picture

ghengis86 said:  "Wait....'our' 30 year is at 2.58%. I'm not sure I have any clue as to what the fuck is going..."

It means the IMF and the FED will be spending U.S. taxpayer money to buy the subordinated Euro bonds.

If the buyer and seller are the same (different in name only) the phony baloney Euro bonds may as well match the U.S. ones.

Banks get the money, taxpayers get screwed (again).

oogs66's picture

yes, and what is typical senior/sub relationship when senior is at 2.5% for 30 years?  the 7% looks cheap.  and also, it's not like the lender is price sensitive since they print money

ZeroPower's picture

Hey oogs. Looks cheap indeed, but it'll get cheaper still. Granted, nobody wants to hold duration, except maybe for a quick flip somewhere along the coming months.

ItsDanger's picture

These days, all debt may be subordinated in any future bailout.  These terms are meaningless when they change the rules every time.

Yellowhoard's picture

The check is in the mail.

I will not cum in your mouth.

Of course I'm wearing a rubber!

bob_dabolina's picture

You won't get pregnant, I have high blood pressure.

ghengis86's picture

I did not have sexual relations with that women.

Iraq has weapons of mass destruction.

Client funds are held in a segregated account.

sumo's picture

No risk of that. No risk.

ZeroSpread's picture

No risk, no fun! 

You need to play to win.


Both featured by the Holy Catholic Church to prevent teenage kids from using rubbers. More sheeple!


(Makes one think.. interesting Chris Martenson article "Peak Sheeple" .. would mean the numbers would decline .. some day..)

booboo's picture

"What is your name?"


"Sir Robin"

"What is your quest?"

"I seek the holy grail"

"Which is the subordinated bond,

10 Year at 7%, or 30 Year at 2.5%?

"a 10 Year at 7%, no wait"


sumo's picture

No-one expects the Spanish Subordination.

Bring out ... the Comfy Chair!

AU5K's picture

Can I use my lifeline.

Big Slick's picture

All you have left is a 50:50

Mercury's picture

Brace yourself, here comes:

17 Shades of Subordination

I know you felt dirty and abused after that time in Detroit and it can be alarming to have the tables suddenly turned on you (and go from Dom-->Sub) but everything's sexier with a European accent...you'll see.

Prepare to be flogged all up and down the capital structure my pretties, we've only just begun!

YesWeKahn's picture

Italians borrow at 6% to lend it to the spanish at 2.5%.

Mentaliusanything's picture

Buy high and sell low. Thats the way we all like it.

Bend over!

chump666's picture

With Germany used as collateral in the great EU bond ponzi


bigkahuna's picture

No worries, the tax payers will cover it! Raise the consumption tax and tell the suckers that it is for their health care. Oh wait, thats whats goin on over here!

holdbuysell's picture

ZH at its snarky finest. Love it....and good catch!

alfred b.'s picture


    I think that I'll let Greenspan explain this one ....he has such a way with words; and this 'conondrum' is right up his alley!

    Buy physical gold and silver, 'cause they are printing.


spooz's picture

Hey, Janet Tavakoli called ZH a "controversial blog", a step up from fringe, no?



sumo's picture

After longing from afar to worship Buffet's genitals, Tavakoli gets a clue.

luna_man's picture





And, whom is this "ZH" you speak of?...

That is none other than: MY MAIN MAN!!

holdbuysell's picture

ZH = Zero Hedge

As self-described:


"Today is the three year anniversary of Zero Hedge.

Starting with humble beginnings and even humbler aspirations, and proceeding through over half a billion page views filled with breaking news, analyses, cynical ruminations, snarky sarcasm, grotesque hyperbole (two words best used to explain our current socio-economic catastrophe), and broadly - entertainment - this website has been lucky enough to grow into the world biggest fully independent financial blog (whatever that means), garnering between 1 and 2 million page views daily (usually VIX-dependent), and serving around 4 million unique readers per month from all around the world."



Edit: ah, now I get it. You're spot on. ZH rocks.

LeisureSmith's picture

Help me i'm Irish, err..no, kiss me i'm stupid. Hmmm no, let me think...

Let The Wurlitzer Play's picture

This is the begining of the "long goodbye".  Right now they will impair long term debt (+2 years), later it will be  impaired again and finally it will be an outright default.  Just watch these municipalities in CA, they will impair/renegotiate in the first bankruptcy only to do a second bankruptcy soon after.  This will be especially true with the municipalities that are early to bankruptcy - they will get jealous of their peers that completely default on their debts and want some of that action.


ekm's picture


And............Berlusconi is back. He'll change the name of the party back to what it was when it was launched: FORZA ITALIA.

A couple of gems:

"Se noi abbiamo di nuovo sotto controllo il nostro bilancio statale è in gran parte grazie al mio governo" - The reason we have under control our national current accout is due to my government"


"Noi ci auguriamo una Germania più europea e non un'Europa più tedesca" - We wish a more European Germany, not a more Germanized Europe.

bank guy in Brussels's picture

Berlusconi may ride the wave back in, on the promise to dump the euro and bring back the Italian lira ... Italy might even be the first to exit the euro.

Italy probably should do it today ... as pointed out in the article by Ambrose Evans-Pritchard in the UK Telegraph on Friday, 'Two steps closer to growth, liberazione, and the Italian lira':


q99x2's picture

I no nothing about bonds but I'll take the 10 year at 7%. Seems like if you reinvested it every 10 years you would have more than 2.5% at the end of 30 years.

Did I do good?.

Wait a minute what if Spain goes bankrupt next month? Then, both would bring in the same amount. Oh I get it you buy the 30 year and sell it before Spain goes bankrupt on the 10 year.

Shit thats why I don't buy bonds.


chump666's picture

Europe will be riot city probably in time for the Olympics sans the BoE buying the English population with credit expansion...to keep them happy for a week or so.

Anyway back to the biggest conjob of them all, China:

 "People are still interested in the dollar as there's a lack of confidence in China's economic growth," says a Shanghai-based foreign bank trader.

Few more days of sideways market, maybe a day of so of rallies.  June 20th top is still in, awaiting Bernanke use of world play to juice market.


MillionDollarBogus_'s picture

The bond rates in the UE countries have to fall to near zero, as they have in the USA and Japan.

They have no real option if they want to keep this game going.

What surprises me is that they have been so high for so long.

The EU central bankers are boy scouts.

Bernanke and Geithner showed them how to fund massive public debt at near zero interest rates, but the EU doesn't seem to understand.

Japan has been doing it for years.

They are racing to the bottom by not changing the rules of the game.

Hard to understand. 

bank guy in Brussels's picture

Jim Sinclair has long suggested it is a distraction game in Europe, to hold people's eyes away from the centre of the debacle, the US.

That makes sense ... Eyes on Europe on the one hand, while Bernanke can secretly supply Cayman Islands hedge funds with fake electronic digital dollars to buy European bonds, or anything else, to keep extreme events from happening in Europe or elsewhere.

Europe is really the world's richest region, with essentially zero poverty among legal residents in many countries here ... we need to appear like a total mess in order to bring the euro lower ... which Germany wants in order to sell exports ... so that is another game.

Another, and tragic, aspect is that the 'austerity' cuts savaging unemployed and low-income people in Greece and Spain and so on, could be an attempt by EU-globalist leaders to destroy the EU 'social contract' that has worked fairly well here, giving us the nicest quality of life on the planet ...

It has always been a goal of the American regime and the globalists to take away social protections, and get people to live in fear, to destroy the kind of secure contented European life we have. The current EU 'crisis' is a chance for them to maul and abuse EU citizens in the 'bailout' countries ... but the globalists are likely to get a revolutionary response here that they did not expect.

bigwavedave's picture

Period. End of Story.

Why didn't the post end there?

Dr. Engali's picture

It wouldn't be the Hedge if Tyler wasn't driving that last snarky nail in the coffin.