Deutsche Bank Stress Seen in Rising Cost of Credit Insuranceby
Credit traders pushing up the cost of short-term swaps
The derivatives turmoil isn’t spilling over to other banks
Credit derivative traders are again expressing concern about Deutsche Bank AG’s weakening financial health.
They’ve been pushing up the cost of short-dated contracts, with one-year swaps climbing faster than that of five-year. The so-called flattening credit curve can be an indicator of stress.
Reports that the German government wouldn’t step in to back Deutsche Bank fueled concerns about its financial health. The U.S. Justice Department is seeking a $14 billion fine even as Chief Executive Officer John Cryan tries to shore up profitability and capital by cutting thousands of jobs and shrinking operations.
“With credit swaps at these levels, it will ring alarm bells and make it even harder for counterparts to conduct business with Deutsche Bank,” said Michael Huenseler, who helps oversee about 17 billion euros ($19 billion) at Assenagon Asset Management in Munich. “There seems to be no relief from negative headlines.”
A rapid rise in default swap prices can fuel even more hedging by firms that trade with Deutsche Bank. Cryan said in February that trading had been affected by derivatives prices that were rising at the time. Charlie Olivier, a London-based spokesman at Deutsche Bank, declined to comment on the lender’s credit-default swaps on Monday.
Investors seeking to protect their exposure to Deutsche Bank pushed gross trading volumes up 50 percent in the week through Sept. 16 to $514 million from the previous week, according to the latest data from the Depository Trust & Clearing Corp. There are a net $3.9 billion of credit swaps outstanding, the most for any bank, the data show.
One-year swaps on Deutsche Bank increased 54.5 basis points to 218 basis points in the past week, while five-year contracts climbed 21.5 basis points to 261.5 basis points, according to the latest prices quoted by CMA.
Despite the focus on the German lender there’s little evidence that’s it’s spilling into the broader financial debt market. Swaps on Deutsche Bank are the riskiest of 30 banks and insurers in the Markit iTraxx Senior Financial Index, which itself fell about two basis points in the period to 101 basis points, according to data compiled by Bloomberg.
Chancellor Angela Merkel’s chief spokesman pushed back against Focus magazine’s report that the government had ruled out any backing for Deutsche Bank and the lender has said it has no intention to pay the DOJ the full amount. Still, the larger-than-expected sum has sparked concerns that it will be forced to tap investors.
The case concerns allegations that the bank misled investors about the quality of subprime mortgage bonds it created and sold during the U.S. housing boom that led to the 2008 crisis. Deutsche Bank also faces inquiries into legal issues including precious metals trading and billions of dollars in transfers out of Russia.
The senior debt of German banks is at risk of losses imposed by regulators after a law passed in November made new and existing securities eligible for a bail-in. That change was partly to blame for the selloff in February, Cryan said at the time. Still, the premium to insure the debt of Deutsche Bank rather than fellow German lender Commerzbank AG has increased to about 120 basis points from about 90 basis points in February.
“Once a selloff begins on Deutsche Bank it can continue on its own momentum because investor sentiment is so fragile,” said Roger Francis, an analyst at Mizuho International Plc in London. “People are very willing to believe bad news about the bank.”