Finance

Lisa Abramowicz is a Bloomberg Gadfly columnist covering the debt markets. She has written about debt markets for Bloomberg News since 2010.

Deutsche Bank just sent a strong message to debt markets, but perhaps it wasn't the one it was planning.

The German lender sold $3 billion of senior unsecured bonds in a private sale Friday, which was bold timing given the recent concern about its financial health. Some interpreted the sale as a power move. "I see it as management attempting to show that it still has market access," Old Mutual Global Investors money manager Lloyd Harris said in a Bloomberg News article on Monday.

Yet the biggest impression from the sale isn't that it happened but rather how much it cost Deutsche Bank to get it done. The lender had to pay twice as big a premium to borrow as it did a year ago, 3 percentage points above benchmark rates compared with 1.4 percentage points in August 2015 on a public sale of similar notes, Tom Beardsworth of Bloomberg News pointed out.

Split Path
Borrowing costs have risen at Deutsche Bank this year while falling at other banks
Source: Bank of America Merrill Lynch index data

Let's take a step back for a moment to understand just how significant this is. Since August 2015, developed-market government bond yields globally have plunged almost in half, to an average 0.6 percent. Yields on dollar-denominated bank bonds have dropped on average while those on investment-grade bonds globally recently plunged to the lowest on record. This has been a historically terrific year for bonds and almost anyone who wanted to borrow money.

Blockbuster Bond Year
Most bonds have gained value this year as analysts lowered their economic forecasts
Source: Bloomberg index data

It's quite different for Deutsche Bank, however. It's getting materially more expensive for the lender to borrow as it negotiates a settlement with the U.S. Department of Justice related to its handling of mortgage-backed securities.

This just showcases how much credibility the bank has lost in credit markets. Its bonds have the highest average yield among the top 50 bank-bond issuers in the U.S. as well as Europe, according to Bank of America Merrill Lynch index data.

Trailing the Pack
Deutsche Bank has the highest borrowing costs among the biggest bank issuers of bonds
Source: The BofA Merrill Lynch US Banking Index

Put another way, Deutsche Bank would have to pay $39.3 million in annual interest on $1 billion of dollar-denominated debt, more than $10 million more than Credit Suisse, Citigroup, Goldman Sachs and Bank of America would have to pay on a similar amount of debt, based on current yields tracked by Bank of America Merrill Lynch index data. That extra expense adds up quickly for a firm like Deutsche Bank, which has more than $100 billion of debt.

While Deutsche Bank may have hoped for this debt issuance to prove its resiliency, it simply underscored its challenges. Everything is becoming more difficult for the bank, even borrowing money at a time of near record-low yields.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Lisa Abramowicz in New York at labramowicz@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net