Having been the first, back in January [4], 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 [5], 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).
[6]
Chart: Bloomberg