Grim Fandango! U.S. 2-Year Swap Spread Turns Negative (First Time Ever!!)

As central banks like the US Federal Reserve try to counter a sagging global economy (and preserve asset bubbles), strange things begin to happen. Like the US 2-year swap spread going negative for the first time ever!

(Bloomberg) — The U.S. 2-year swap rate moved below the 2-year Treasury note’s yield for the first time ever Tuesday after 3-month dollar Libor’s latest drop, turning the 2-year swap spread negative. It was the last tenor on the swap spread curve to fall below zero.

Currently around -0.25bp, 2-year spreads dropped as low as -0.5bp, tighter on the day by 1bp; spread is tighter by ~12.5bp since the start of May

  • 3-month dollar Libor fixed lower by 2.16bp at 2.31125 Tuesday, lowest since August 2018
  • A combination of higher general collateral rates, overseas selling and hedging flows have weighed on front-end spreads over the past couple of months;

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Here is the US Dollar Swap Curve and the Swap Spread curve.

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Is this a Grim Fandango?

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Hackepeter! Deutsche Bank To Set Up €50 Billion ‘Bad Bank’ As Part Of Overhauls (Largely Long-dated Derivatives)

Like the Led Zeppelin song “Good times, Bad times,”  German mega bank Deutsche Bank is trying to save itself by splitting into a good bank and a bad bank.

Why is my former employee doing this? Deutsche Bank was a high-flyer back in May 2007 when it was trading at over $120 per share. It is now trading at an anemic $6.79 per share. And the trend is miserable.

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The good bank / bad band model had
been discussed widely during The Great Recession. In the US, Treasury and Congress decided to purchase troubled assets from bank balance sheet (TARP). This approach helped removed “toxic” assets from US banks’ balance sheets, so the US government became the bad bank.

But Deutsche Bank is doing this one their own, rather than having the German government and the European Central Bank

From Financial Times: Deutsche Bank is preparing a deep overhaul of its trading operations including the creation of a so-called bad bank to hold tens of billions of euros of assets as chief executive Christian Sewing shifts Germany’s biggest lender away from investment banking.

The plan would see the bad bank house or sell assets valued by the German lender in its accounts at up to €50bn after adjusting for risk.

Deutsche’s equity and rates trading businesses outside continental Europe will be severely shrunk or closed entirely as part of the revamp, although the final decision is pending, according to four people briefed on the plan. Managers are also set to unveil a new focus on transaction banking and private wealth management.

The proposed bad bank, which is known internally as the non-core asset unit, will comprise mainly of long-dated derivatives, the people said. 

Well, Deutsche Bank has been shrinking its derivatives liabilities from over 1 trillion to a more modest 316 billion. But apparently this amount will be unwound, partly using the non-core asset unit.

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Deutsche Bank represents a clear and present danger to the international banking system including US banks (and investment banks).

DB IMF 1

Consider Deutsche Bank to be like the unappetizing German dish Hackepeter (raw pork) that even the European Union warns against. [I actually ate this dish thinking it was beef tartare like they serve in Paris].

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I wish Deutsche Bank all the best in its efforts to escape investment banking and return to core banking. Let’s see if Deutsche