Deutsche Bank's Wrong-Way U.S. Inflation Wager Hurts Trading

  • Soured trade contributes to 12% drop in FICC, its biggest unit
  • Head of U.S. inflation Bourne has since left Deutsche Bank

Deutsche Bank AG, struggling with U.S. competitors, legal and technology costs and clients pulling back, had a further problem in the second quarter: its own traders.

Revenue from fixed-income trading, the Frankfurt-based lender’s biggest business, fell 12 percent to 1.1 billion euros ($1.3 billion) in the three months through June, more than double the decline predicted by analysts at HSBC Holdings Plc. The slump was impacted by a bad bet that traders made on U.S. inflation, which could cost Deutsche Bank as much as $60 million, according to a person familiar with the matter.

The loss, which compounded a revenue drop across Deutsche Bank’s trading businesses, shows the impact that one soured wager can have at one of the world’s biggest investment banks. The bet on U.S. inflation, which Bloomberg reported last month, triggered an internal probe into whether traders breached risk limits.

“Banks that are focused on being major market makers, if they want be fixed-income kings, are going to inevitably have bigger risk-management challenges,” said Peter Hahn, the Henry Grunfeld professor of banking at the London Institute of Banking and Finance. “It should heighten Deutsche Bank’s awareness to interest-rate risk at the low end of the curve.”

Revenue at Deutsche Bank’s U.S. rates-trading division, which houses inflation trading, fell amid a “difficult quarter for market making,” the firm said in a presentation. Jacob Bourne, who described himself on LinkedIn as the lender’s “head of U.S. inflation,” has since left.

Sales across the bank’s fixed-income business fell by 158 million euros from the same period a year earlier. Clients pulled back from trading products tied to foreign exchange and interest rates across the Asia-Pacific region, while sales also slid in emerging markets, the lender said in the presentation.

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