Weekly Commentary: The Big Pivot

Germany’s Deutsche Bank CDS spiked 30 higher intraday Friday, to 210 bps – surpassing panicky market levels from last October and even March 2020. Deutsche Bank CDS had dropped 21 bps Monday, relieved Swiss officials had orchestrated a Sunday evening takeover (bailout) of troubled Credit Suisse by UBS. With Credit Suisse’s troubles supposedly an anomaly, markets were hopeful a European banking crisis had been quickly nipped in the bud.

Not so fast. Deutsche Bank CDS surged 50 bps Thursday and Friday to multi-year highs, as the stock was slammed almost 9%. And a 6% late-week selloff more than reversed the post-Credit Suisse bailout European bank stock rally (STOXX 600).

March 19 – Bloomberg (Neil Callanan, Tasos Vossos and Priscila Azevedo Rocha): “Among the biggest losers in the shotgun sale of Credit Suisse Group AG are investors in the firm’s riskiest bonds, known as AT1s, worth $17 billion. These money managers are set to be wiped out — potentially sending that $275 billion market for bank funding into a tailspin… Creditors are frantically poring through the fine print for these so-called additional tier 1 securities to understand if authorities in other countries could repeat what the Swiss government did on Sunday: Wiping them out while preserving $3.3 billion of value for equity investors. That’s not supposed to be the pecking order, some holders in the bonds insist.”