The Short Ban Is Back: Are Corporate Bonds Exposing You To Southern Europe?

by: Kyle Spencer

On July 18th, I reported that Intesa Sanpaolo, Unicredit and other Italian banks were overexposed to the PIIGS debt crisis. That analysis was borne out today when Intesa (OTCPK:ISNPY), Unicredit (OTC:UNCIF), and other Italian financials plunged as a result of Spanish bond yields shooting above 7% once again. The SPDR S&P 500 ETF (NYSEARCA:SPY) was off -2.53 (-1.85%) as of this writing. As a result, last summer's short-selling ban in Italy and Spain has been re-instated.

I predict that the short-selling ban will accomplish exactly the same thing it did when it was instituted back in the summer of 2011, which is to aggravate the sell-off and risk aversion across the board. Protect yourself accordingly.

Two more things I'd like to mention:

  1. The short-selling ban is a knee-jerk reaction that is highly unlikely to be effective.
  2. Just because you don't think you own Spanish and Italian debt doesn't mean you don't own Spanish and Italian debt. As previously pointed out by Seeking Alpha's Eric Parnell, Investment Grade Corporate Bond ETFs and mutual funds, including iShares iBoxx $ Investment Grade Corporate Bond (NYSEARCA:LQD), the Vanguard Intermediate-Term Corporate Bond Index (NASDAQ:VCIT) and the iShares Barclays Intermediate Credit Bond (NYSEARCA:CIU) are directly exposed to financials (34.75% allocation) in general; with 6.34% of that in European financials such as Barclays (NYSE:BCS), UBS (NYSE:UBS), RBS (NYSE:RBS) and Deutsche Bank (NYSE:DB), all of which are heavily invested in PIIGS debt. LQD in particular has continued to perform well despite the risk that Spain and Italy pose, however, you may wish to reassess your position at this time in light of the ECB's increased willingness to impose losses on bondholders.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.