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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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Mon, 07/23/2012 - 15:41 | 2643551 sessinpo
sessinpo's picture

More like failure, but not imminent.

Mon, 07/23/2012 - 15:54 | 2643578 Precious
Precious's picture

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

Mon, 07/23/2012 - 15:57 | 2643586 Pladizow
Pladizow's picture
Is Spain's 15%+ 'Legal-Arbitrage' 6 Month Return Signaling An Imminent Bailout?

If it isnt, 10 other things are!

Mon, 07/23/2012 - 21:03 | 2644258 AldousHuxley
AldousHuxley's picture

http://www.youtube.com/watch?v=E3inSDh2a7I

 

spain riot

 

 

Malcolm X Speech: 'Stop Singing, Start Swinging!'
Mon, 07/23/2012 - 16:11 | 2643588 ZerOhead
ZerOhead's picture

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

Mon, 07/23/2012 - 16:16 | 2643626 battle axe
battle axe's picture

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

Mon, 07/23/2012 - 16:37 | 2643671 TheCanadianAustrian
TheCanadianAustrian's picture

Not Einstein. Stop perpetuating this annoying misquote.

Mon, 07/23/2012 - 16:50 | 2643693 Pladizow
Pladizow's picture

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

Mon, 07/23/2012 - 17:25 | 2643775 Neethgie
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

Mon, 07/23/2012 - 17:53 | 2643847 TheCanadianAustrian
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.

Mon, 07/23/2012 - 22:53 | 2644477 DeadFred
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.

Mon, 07/23/2012 - 15:45 | 2643559 Cangoroo
Cangoroo's picture

History repeats itself

Mon, 07/23/2012 - 15:53 | 2643575 Bastiat009
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.

Mon, 07/23/2012 - 15:54 | 2643580 distopiandreamboy
distopiandreamboy's picture

Bernanke's got some carrots in his speech tomorrow

Mon, 07/23/2012 - 15:55 | 2643584 Precious
Precious's picture

Doubt that.  The tools are out of governors.

Mon, 07/23/2012 - 15:55 | 2643583 GeezerGeek
GeezerGeek's picture

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

Mon, 07/23/2012 - 16:12 | 2643622 Bastiat009
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.

Mon, 07/23/2012 - 16:06 | 2643598 bigdumbnugly
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.

 

Mon, 07/23/2012 - 15:53 | 2643576 mark7
mark7's picture

Take out London and New York. Nuke the fuckers.

Mon, 07/23/2012 - 15:54 | 2643579 kito
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............

Mon, 07/23/2012 - 16:00 | 2643593 fonzannoon
fonzannoon's picture

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

Mon, 07/23/2012 - 16:02 | 2643601 Deep79
Deep79's picture

And how does that usaully end?

 

 

Mon, 07/23/2012 - 15:55 | 2643581 PontifexMaximus
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.

Mon, 07/23/2012 - 16:02 | 2643599 Cangoroo
Cangoroo's picture

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

Mon, 07/23/2012 - 15:57 | 2643585 GlomarHabu
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.

 

Mon, 07/23/2012 - 16:00 | 2643597 Dr. Engali
Dr. Engali's picture

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

Mon, 07/23/2012 - 16:04 | 2643605 TrainWreck1
TrainWreck1's picture

This time a bailout will work.

We have a secret genius working behind the scenes.

http://discourseincsharpminor.files.wordpress.com/2010/03/goodhillary8.jpg

 

 

Mon, 07/23/2012 - 16:10 | 2643619 J 457
J 457's picture

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

Mon, 07/23/2012 - 16:16 | 2643627 Cangoroo
Cangoroo's picture

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

Mon, 07/23/2012 - 16:32 | 2643659 rodocostarica
rodocostarica's picture

So how does a little guy do this trade?

Mon, 07/23/2012 - 17:40 | 2643823 Cangoroo
Cangoroo's picture

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

Mon, 07/23/2012 - 17:01 | 2643722 youngman
youngman's picture

SO now again the Bond "word" games begin...is the paragraph in the bond or not...is it a UK vs a EU....do 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....

Mon, 07/23/2012 - 18:03 | 2643886 q99x2
q99x2's picture

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

Mon, 07/23/2012 - 18:30 | 2643955 Cangoroo
Cangoroo's picture

Check this out

 

http://www.bourse.lu/application?_flowId=ValueSummaryObligationFlow&cdVal=33333&cdTypeVal=OBL

 

Only 200 m pounds. There is no real market.

Mon, 07/23/2012 - 19:21 | 2644052 smiler03
smiler03's picture

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

Mon, 07/23/2012 - 21:31 | 2644332 Signs of the end
Signs of the end's picture

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

Tue, 07/24/2012 - 08:21 | 2645037 Watson
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...

Mon, 07/23/2012 - 23:25 | 2644530 AurorusBorealus
AurorusBorealus's picture

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

 

Keep it that way.

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