Bizarro Invasion! Denmark And German Sovereign Yields Negative (And 10Y German Yields BELOW The ECB Main Refinancing And Deposit Rate!)

The European Central Bank’s President, Mario Draghi, 8-year term is up in October … and  Christine Lagarde of the International Monetary Fund has been chosen to replace him. Will Lagarde continue Draghi’s policies (yes) or change course (no)?

But Europe has been invaded by the bizarro legion.

Case in point. Both Germany and Denmark have negative sovereign yields out to 20 years. Germany, which has issued longer maturity sovereign debt, has slightly positive yields beyond 20 years.


And the German 10-year Bund yield is now below the ECB Main Refinancing Rate, ECB Deposit rate and the European Financial Stability Facility (EFSF) rate. How bizarre is that?


Yes, the monetary Bizarro legion has invaded earth (or at least Japan and Europe).  And the US monetary policy has been bizarro since Alan Greenspan.




US Treasury And Swap Curves Remain Sagging, Europe Sagging Too (Except Italy)

Apparently, the sags are here to stay.

The US Treasury Actives curve (green) is downward sloping until 3 years, then upward sloping after 3 years. The US dollar swaps curve (blue) is downward sloping until 1 year, then double dips at 4 years before rising again. The overnight indexed swap rate (red) is downward sloping until 4 years then rises. This is called “the sag.”


But US markets are not the only one sagging. In Europe, the majors Germany (blue), France (green) and the UK (purple) sovereign curves are all sagging, with the exception of Italy (red).


(Bloomberg) — Italian bonds led a European rally as hints of fresh stimulus from policy makers outweighed the impact of easing global trade tensions.

The securities surged Monday to send benchmark yields below 2% for the first time since May 2018, while German bund yields hit a fresh record low. European Central Bank officials gave signals that action may be on its way in an effort to revive the region’s inflation, while investors in Italy are growing confident Rome will avoid punishment from the European Union over its budget.



Twilight Zone? Treasury Yields Flirt With 2% As Draghi and Trump Whipsaw Bonds (Negative Yield Global Bonds Near $12.2 TRILLION)

The US-China tariff squabble is definitely roiling markets, but the global economic slowdown (read Europe) is helping push interest rates into The Twilight Zone.

(Bloomberg) — Government debt markets surged worldwide on Tuesday on the growing prospect of central-bank stimulus amid concern about dimming global growth. The move lost some steam on signs of apparent thawing in U.S.-China tensions.

Benchmark 10-year Treasury yields slid as much as 8 basis points to 2.01%, the lowest level since 2017, as comments from European Central Bank President Mario Draghi dragged down rates across Europe. French, Swedish, German and Austrian 10-year yields fell to unprecedented lows. The move in Treasuries was briefly reversed, in part, following news that the U.S. and Chinese presidents will meet at the upcoming Group-of-20 summit in Japan, assuaging some market concerns about the fractious relationship between the world’s two largest economies.

Federal Reserve officials, who are due to deliver a policy decision on Wednesday, are confronted by a market that is pricing in a quarter point interest-rate cut by July and around 62 basis points of easing by the end of this year. Comments from Draghi that additional stimulus may be needed if the economic outlook doesn’t improve added fuel to bets on ECB rate cuts, and in turn helped spur speculation that the U.S. central bank will act too. The 10-year yield was around 2.05%, down 4 basis points on the day, as of 11:48 a.m. in New York, while U.S. equities also climbed.

“Draghi’s comments were one more indication that one of the major central banks will likely begin another round” of monetary support, said Mark Grant, chief global strategist of fixed income at B. Riley FBR Inc. “This gives the Fed one more reason to consider cutting rates because the American rates are so much higher than those in Europe or Japan. U.S. 10-year yields are headed lower.”


The ECB is grappling with an economic slowdown and an inflation rate that remains entrenched below its goal. In the U.S., the Fed is faced with inflation running persistently below the Fed’s 2% target, falling inflation expectations and signs that the labor market is beginning to slow.

And the global stockpile of negative yield bonds is near $12.2 TRILLION.


Europe is really seeing plunging sovereign yields with Sweden now in negative yield territory at the 10-year maturity.


But negative interest rates don’t seem to be helping European economies.


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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.


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.


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


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