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 [4] (which worked out extremely well for Greek PSI holdouts), is beginning to be priced into Spanish debt also. As we pointed out yesterday (here [5] and here [5]), 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).
[6]