Spanish "Litigation Arb" Trade Is The New Killing It

Tyler Durden's picture

Having been the first, back in January, to propose positioning to gain from (or to protect client funds from - for bond managers) the implied subordination (or cram-downs) that the ECB's, or any other 3-letter acronym's, unintended consequences cause, as they decide to bailout the next European nation - via positioning in non-local-law bonds in all PIIGS nations (or 'swapping' local-law for non-local-law), our most recent Spanish-specific example has performed exceedingly well. Last Tuesday, we urged fixed income managers (for fear of fiduciary duty recrimination) to swap to the non-local law Spanish bonds and traders to arbitrage the litigation risk between local- and non-local-law bonds. In that time, the difference in price between the two bonds has dropped dramatically as the local-law bonds have dropped almost 8% in price, while non-local-law are practically unchanged. On a 50% margin basis, the trade is up around 80% in real returns in the past week (with the basis shifting from around EUR10 to EUR5.8).

Chart: Bloomberg

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
dannyboy's picture

Who says ZH has no tradable information ;)

CPL's picture

Tonnes of great stuff on here to trade on if your timing is right, but I can tell you what one of the easiest investments is on ZH to make.


Donate to the Tylers so they can keep gunning the man with the boots and keep a small tranche of traders healthy and wealthy.

falak pema's picture

you can now go for your week end in Venice. 

SDS Trader's picture

Agree; good call on ZH.  I also like when they fade Stolper trades !

silver500's picture

And then the Greeks literally take my out of hospitals to pay people who purchased the non-local law bonds and we profit.  It makes me sick.

GMadScientist's picture

Did you decide to gamble while having sick people to take care of?

GMadScientist's picture

Muchas Gracias, Tyleros.

DormRoom's picture

You have a bunch of 'print. print. print.' Central Bankers trying to get the one country (Germany) to join in the print addiction, which will ultimately implode the financial sector in a few years.


The structural problem is still here: 700 Trillion leveraged on 70T of real assets.  Printing more money doesn't create more real assets.  Productive labour creates real assets.  But productive labor has been crowded out by capital flows. Hence the need for constant printing, and expanding collateral chains.

ROCE's picture

Hey guys, quick question...

Which broker in Europe would enable you to do this litigation arb trade ?

Thanks for the reply !

TideFighter's picture

Tyler, between you and Reggie, I have had some "heavy lifting' performed for me this year. Fiat on its way, I'm sure you'll put it to work.

Apathetic or Whatever's picture

I am too stupid to even understand the article let alone figure out how to make that trade.  However, I am smart enough to have figured out how to buy gold and silver.

GeezerGeek's picture

While applauding your insights, I find it mildly distressing that these sorts of manuevers are even possible. Financial engineering/chicanery has replaced rocket science as the archetypically most complicated field of human endeavor. Except, that is, for the field of trying to understand women.

DavidC's picture

That paragraph of yours made me smile!

Flesch Reading Ease 24
Flesch Kincaid Grade Level 19.8


GMadScientist's picture

It's like trying to read German.

timbo_em's picture

Tylers, how about starting some ETFs to make your ideas accessible for small investors?

PeeramidIdeologies's picture

Ya really, all these swings, but no play grounds for the little guys... I'd buy.

Alejandrito's picture

the issuance of bonds or debentures with a different law is widely used in poorer countries to gain more credibility. It is surprising that this be done by Spain.

ZeroPower's picture

It's a shame the liquidity of said bonds (UK at least) is horrific...