Dan Loeb And The Portugal Connection

Portuguese bonds imploded this week with 10Y spreads rising over 70bps, which given its recent performance, got us wondering. For the last few weeks we have commented on the improvements in the Portuguese bond market's yields and spreads - specifically how this seemed much more about the CDS-Bond basis (on cheap carry and renewed confidence in CDS trigger events via ISDA) than simple risk appetite. It was especially surprising given the rest of Europe's sovereign bonds were deteriorating gradually in a somewhat range-bound market. Today we get some insight - courtesy of Dan Loeb's Third Point hedge fund's month-end performance details. The Dapper-Don notes Portuguese Sovereign Bonds as among its top-winners for the month of April - which overall was a poor month for the fund.

We suspect the plan went something like this: Loeb had one of his hedge-fund-huddles; the cartel all bought into Portuguese bonds (or more likely the basis trade - lower risk, higher leverage if a 'guaranteed winner'); bonds soared and the basis was crushed; now that same cartel - facing pressure on its AAPL position (noted as one of Loeb's largest positions at the end of April) - has to liquidate (reduce leverage thanks to AAPL's collateral-value dropping) and is forced to unwind the Portuguese positions. A quick glance at the chart below tells the story of a Portuguese bond market very much in a world of its own relative to the rest of Europe this last month - and perhaps now we know who was pulling those strings?

Portuguese bonds have been on an incredible run (thanks to their illiquidity) and so a fund (or group of funds) could easily allbenefit from a concerted effort...

 

especially in the basis trade... (where we some profit-taking this month - which fits with our view above)...

 

Charts: Bloomberg

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