The Spanish 'Legal-Arbitrage' Bond Trade Is On

Tyler Durden's picture

As subordination and the inevitable cram-down of European sovereign debt becomes increasingly clear, the 'legal-arbitrage' that we were first to point out back in January in our Subordination 101 post (which worked out extremely well for Greek PSI holdouts), is beginning to be priced into Spanish debt also. As we pointed out yesterday (here and here), being long non-local-law Spanish bonds against a short in a well-matched local-law Spanish bond offers significant upside should things start to get really-ugly (as opposed to the current just-ugly) in Europe. It seems obvious to us that, arbitrage aside, bond portfolio managers should be seeking out these non-local-law bonds and swapping into them (as part of their Fiduciary duty to their investors) if their mandates force them into owning Spanish bonds. In the meantime, as is clear from the chart below (and noted that liquidity/sourcing of the non-local-law bonds is tough but that's why you pay your bond broker so much) that the 'trade' or swap is beginning to be positioned (and especially the last two days where the non-local-law bond has actually risen in price as the local-law bond has crashed).


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camaro68ss's picture

[ song] What does Merkel dream of
When she takes a little German snooze.
Does she dream of Spanish bond yields
Or Rob Emanuel in his ballerina suit.

SilverTree's picture

Facebook Hit With Six Separate Investor Lawsuits As Stock Becomes a Cruel Joke

Ratscam's picture

options on that pair trade would make you rich

SmoothCoolSmoke's picture

Must be Bullish.  Spy pops 15 in 30 minutes.  What's the rumor?

asteroids's picture

And so it begins! Once bond holders start down the road it's hard to stop or reverse. This will be a repeat of Greece, but much much worse for the markets. It should also go much quicker. Strap in boyz, leave the women and children at home.

akansemper's picture

does anybody know if the CDS on Greece will be triggered after the voluntary haircut, when Tsipiras wins and will stop paying creditors and renegotiate?

s2c's picture

Tyler, do you have the bloomberg function to find the spanish UK/foreign law bonds.  The local bonds are easy to source so not sure there are liquidity issues there.  Aside from the Catalan bonds, hard to locate any other foreign law bonds.