What do you get when you merge German zombie Deutsche Bank and zombie Commerzbank? An ogre zombie bank!
Or as Billy Preston almost sang, “Nothing Plus Nothing Equals Nothing.”
Both Deutsche Bank and Commerzbank are trading at under $10 or 10 Euros per share. This is down from over $100 per share for Deutsche Bank in the 2000s and Commerzbank was trading at over 200 Euros as well. How the once mighty have fallen.
Earning per share for Deutsche Bank have plummeted despite efforts to revamp their business model.
The same goes for Commerzbank.
While Commerzbank hasn’t issued any contingent collateral (CoCo) bonds, Deutsche Bank has issued 4 CoCo bonds. Here is the 6% CoCo bond. The good news? Both CDS and the yield to maturity (YTM) have been declining in 2019, likely reflecting the expected merger of the two.
The downside? Merging two large zombie banks creates an “Ogre Zombie” bank. One that the ECB and German government cannot permit to fail.
European bond volatility (according to the Merrill Lynch 3-month EUR option volatility estimate) has plunged to the lowest level on record.
A similar chart for the US bond market is the Merrill Lynch Option Volatility Estimate for 3-months shows exactly the same thing. The US bond market is grinding to a halt.
Note that the US MOVE 3-month estimate hit a low in May 2007, just ahead of The Great Recession of 2007-2009.
The ECB’s Mario Draghi has decided to raise the dead (as in Modern Monetary Theory) by reviving the ECB’s Targeted Longer-Term Refinancing Operations.
Mario Draghi revealed the biggest cut in the European Central Bank’s economic outlook since the advent of its quantitative-easing program as policy makers delivered a new round of stimulus to shore up growth. The ECB president said the euro-zone economy will expand just 1.1 percent this year, 0.6 percentage point less than forecast in December.
The central bank will revive its Targeted Longer-Term Refinancing Operations to encourage banks to provide credit to businesses and consumers, and will hold interest rates at current record-low levels at least through the end of the year, several months later than previously indicated.
The Euro declined on Draghi’s announcement.
And most Euro area 10 year sovereign yields are down 5 basis points or more.
Draghi must not read from the Modern Monetary Theory (MMT) book!
An interesting chart of the 30-year sovereign yields less Fed Funds rate reveals that much of the world is in a state of global yield curve inversion. (Graph courtesy of the great folks at Crescat Capital).
While the US is not in a state of yield curve inversion (except for the 1-5 segment), the US remains (for the moment) is positive territory.
I prefer using the 10-year Treasury Note for curve analysis rather than the 30-year Treasury Bond.
One might observe that Treasury volatility measures are quite low … again.
So, yield curve inversion is the same all over the world. The US seems to be on track to invert as well.