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