Is Spain's 15%+ 'Legal-Arbitrage' 6 Month Return Signaling An Imminent Bailout?

Tyler Durden's picture

In what has become one of the most widely read and distributed of our posts, we first introduced the world to the intricacies of legal 'subordination' and protection among European bonds back in January of this year (and reaffirmed it specifically for Spain in early June). This strategy proved exceptionally successful in the case of Greece, and has, in recent weeks, also done extremely well in the case of Spain. Since we first noted it, the local-law Spanish 2029s are down over 14% while the non-local 'UK-law' Spanish 2029s have managed to gain 1.1% providing arbitrageurs with a massive profit on a duration-matched low-capital pairs trade. More importantly, for all the European fixed income asset managers who owe their clients as least some fiduciary duty, we can only hope they rotated to the non-domestic-law bonds before early May - when trouble really hit. While gloating on one's success at non-vaporizing cash once again is not our way, we much more critically note that one can read the fundamentals (as opaque as they are and known to everyone) or one can look at what the market is saying. What it is saying is that the differential between UK- and non-UK-law bonds has been crushed and is absolutely on a path to repeat the Greek PSI experience. There is plenty of room left for the trade since the UK-law bonds will likely be taken out at Par (just as with GGBs) while Spain's PSI is just as likely to be the 20s/30s - and any TROIKA funding will prime everyone but the UK-Law bonds.

Since our initial suggestion that arbs trade the pair and managers rotate their exposures...


and specifically in the last few weeks...


Charts: Bloomberg

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sessinpo's picture

More like failure, but not imminent.

Precious's picture

No worries.  They opened a new line of credit with Paypal.

Pladizow's picture
Is Spain's 15%+ 'Legal-Arbitrage' 6 Month Return Signaling An Imminent Bailout?

If it isnt, 10 other things are!

AldousHuxley's picture


spain riot



Malcolm X Speech: 'Stop Singing, Start Swinging!'
ZerOhead's picture

Seems things are getting a little more Spainful these days...

battle axe's picture

"Insanity is doing  the  same thing  over and over and expecting a different result" Einstein.

TheCanadianAustrian's picture

Not Einstein. Stop perpetuating this annoying misquote.

Pladizow's picture

Hey "?Einsten?", does the quote not hold true or is who first said it more important?

Neethgie's picture

"The trouble with quotes on the Internet is that it's difficult to determine whether or not they are genuine." 

- Abraham Lincoln

TheCanadianAustrian's picture

No, the quote doesn't hold true (ANY quantum physicist can assure you of that, not just Einstein) and it's annoying that Einstein's legacy of intelligence is unfairly stained by this one very unintelligent comment.

DeadFred's picture

While your objection is valid at the micro level where quantum wave functions rule the day it is generally not accepted at the level of an organism where the wave functions are so unstable the objects behave in a classical manner making the supposed quote much more valid. Interesting theories have conjectured that unknown factors (maybe electron tunneling in neural microtubules) can stabilize the quantum wave funtions even at the organism level, leading to what we refer to as consciousness and choice. If this is true then your criticism gains validity. But can the wave functions be stable in what amounts to a collective consciousness such as an economy? If not then trying the same thing again and again will have the same results within narrow very statistical bounds.

Of course a mathematician specializing in chaos theory will say the result each time will depend on whether a butterfly flapped its wings in China or not, but what does he know? He's just a stupid mathematician.

Cangoroo's picture

History repeats itself

Bastiat009's picture

Euro and stocks rallying ... nothing to worry about here folks. Tomorrow will be rosy again. Another 12-hour depression comes to and end.

distopiandreamboy's picture

Bernanke's got some carrots in his speech tomorrow

Precious's picture

Doubt that.  The tools are out of governors.

GeezerGeek's picture

Or is it that "another 12-hour dose of reality comes to an end"?

Bastiat009's picture

Unfortunately some people have been living that depression for years. Youth unemployment over 50% in Spain. Spain is not a third world country. Spain is a large, civilized, western world country. The depression is real. The financial markets are despicable and mostly stupid, along with politicos and most media.

bigdumbnugly's picture

Another 12-hour depression comes to and end.

12 hour depressions are about as long as the modern mind will concede to before happy thoughts need supplant them. 

the peeps have been conditioned by all those tv hour sitcoms that in spite of whatever calamity is plaguing the star characters that day - before those 30 minutes are up all will be right with the world.

rally on.


mark7's picture

Take out London and New York. Nuke the fuckers.

kito's picture

we need all of these pretty charts to know that an imminent bailout is coming? kinda obvious yes? the entire planet is one free lunch thanks to cb liquidity and the markets know this...there is no fear, there is no panic, all will be soothed over by our glorious and mighty cb leaders............

fonzannoon's picture

An imminent rumor of a major bailout is due to be leaked. Thats for sure.

Deep79's picture

And how does that usaully end?



PontifexMaximus's picture

Who cares about Spain, a no brainer. Draghi will fix it. Move on. And:iit's an election year in the US, so everything will be ok.

Cangoroo's picture

For two more weeks ECB can only fiddle the FX markets. The French are taking their annual sunbathe.

GlomarHabu's picture

All around the periphery , the tangential we daily go,seeking explainations which are guesswork at best. Of course we can look to David Hume's Fork for comfort, reinforced by Kant's Critique of Pure Reason.

Of Hume's Fork we have:

Statements about ideas. These are analytic,necessary statements that are knowable a priori.

Statements about the world. These are synthetic, contingent, and knowable a posteriori.

The caveat to these in todays world is that we are completely down to Alice in Wonderland. It's all a weird prism where neither a prior nor a posteriori matter.

It would be fair to say "de asini umbra disceptare" ..... to argue about the shadow of an ass.

I was going to add a few charts so the MEGO effect could really have an impact but I figured the above already addressed that condition.


Dr. Engali's picture

Great work as usual Tyler. Yo are always ahead of the curve.

TrainWreck1's picture

This time a bailout will work.

We have a secret genius working behind the scenes.



J 457's picture

ZH needs to open a "hedge" fund to take advantage of these golden opportunities.   

Cangoroo's picture

Well, yes and Spain can do nothing about it given Santander's British love affair.

rodocostarica's picture

So how does a little guy do this trade?

Cangoroo's picture

XS0096272355, I would say better forget about it. No liquidity, already sold out.

youngman's picture

SO now again the Bond "word" games the paragraph in the bond or it a UK vs a we know how many hands are now out asking for a bailout in Spain....Italy....Greece....we are talking trillions.....the stock markets are down 5% today...thats got to hurt someones portfolio....Hedges..or Pensions...or Joe the Plumbers....someone lost a lot of "wealth"....and finally when I APPLE going to save the commentators...they like to talk about APPLE...all day long....APPLE...APPLE...aren´t they so cute...a new toy....meanwhile gold and silver dither...but I suspect someone is buying the hell out of it....and taking delivery somewhere....

q99x2's picture

Pretty graphs except for the orange with the red arrows. Those colors don't go together very well.

smiler03's picture

Hasn't Spain banned speculation in UK-law bonds yet?

Signs of the end's picture

What makes UK law bonds untouchable? Anyone have the answer?

Watson's picture

They are not untouchable, but they do have the fun-type characteristic that if the Spanish default on them, then the holder could get an English Court order to force the sale of any Spanish assets held under English legal jurisdiction.

And a possible example of such an asset is the Spanish Embassy in London, which seems to be a substantial building with a rather expensive (SW1) address...

AurorusBorealus's picture

While gloating on one's success at non-vaporizing cash once again is not our way


Keep it that way.