Deutsche Bank’s 6.25% Perpetual CoCo Bond Is Going CoCo Loco!

A friend of mine testified in the US House of Representatives that CoCo (Contingent Convertible) bonds are the savior of the banking industry. Apparently he didn’t know about Deutsche Bank’s precarious position!

Additional Tier 1 contingent convertible bonds, CoCos, are among the riskiest debt because they can be wiped out to create capital for a bank in a financial crisis. While they are sold as perpetual bonds, they are typically callable after five years. Secondary market pricing of the debt is based on the expectation they will be redeemed at the first call date.

One CoCo bond stands out in the CoCo Loco-sphere: Duetsche Bank’s 6.25% bond. Which is signalling a potential wipe out.

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This is not surprising given Deutsche’s performance since the global financial crisis when it peaked at $125 per share in May 2017 and is now trading at an abyssmal $8.31 per share.

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Deutsche Bank’s 6.25% CoCo bond is going loco!

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“Bond King” Gross Retires, Dudley “Amazed and Baffled” About Fed’s Balance Sheet Unwind And World’s Largest Pension Fund Suffers Catastrophic Quarter (Boogie In The Dark?)

I feel like investors are doing the “Boogie In The Dark” when it comes to understanding this broken market.

What’s going on?

First, bond king Bill Gross (formerly of PIMCO then Janus-Henderson) has thrown in the towel after 50 years.  His success at PIMCO was in the greatest bond bull run in modern history. But his Janus fund started near the peak of The Fed’s QE3 balance sheet expansion. Then his fund underperformed when The Fed started unwinding their balance sheet (and raising their target rate). Translation: The Fed got bond king Gross dizzy … and he retired.

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And that brings me to the former New York Fed President William Dudley.

(Bloomberg) — Former Federal Reserve Bank of New York President William Dudley said he’s “amazed and baffled” at the attention the wind-down of the U.S. central bank’s balance sheet has been receiving from investors, pointing to other culprits as the likely cause of recent volatility in financial markets.

Amazed and baffled? Just ask Bill Gross about the importance of Fed’s wind-down.

Then we have the world’s largest pension fund, Japan’s Government Pension Investment Fund that lost 9.1 percent, or 14.8 trillion yen ($136 billion), in the three months ended Dec. 31. The decline in value and the rate of loss were the steepest based on comparable data back to April 2008. Domestic stocks were the fund’s worst performing investment, followed by foreign equities. Assets fell to 150.7 trillion yen at the end of December from a record 165.6 trillion yen in September.

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But who helped break the market by distorting asset prices and returns? The Federal Reserve and other global central banks.

With so many uncertainties in global market (Brexit, trade wars, Venezuela’s meltdown, The Fed’s uncertain policy path, Italian debt crisis. etc., …

(Bloomberg) — Italy is preparing to sell as much as 1.8 billion euros ($2.1 billion) of state-owned real estate as it seeks to rein in soaring debt, people with knowledge of the plan said.

investors should hedge their risk exposure across markets … or move to cash or short-term Treasuries. In other words, take out some insurance.

Lastly, down in Virginia, we are suffering through yet another embarrassing governor (Northam) after McAuliffe and his electric call debacle.

Bye, bye Bill Gross. I can’t stand to see you go.

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Opa! Citi’s US Economic Surprise Index Skyrockets As The Eurozone Resembles Saganaki (304k Jobs Added In January)

The US economy is experiencing a sudden surge of economic reports that exceed expectations. So much so that the Citi Economic Surprise index has skyrocketed.

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The  Eurozone, on the other hand, resembles Saganaki. That is, “Your cheese is on fire!”

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The US economy added another 304,000 jobs in January. A record 100th consecutive month of job gains!

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On the other hand, YoY average hourly earnings slumped.

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I wonder if ECB head Mario Draghi will say Opa!!

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Mambo Italiano! Italy Falls Into Recession (Again) as Output Shrank More Than Forecast (Italian Bank Assets Plummet, ECB Ineffective)

It is the continuing mambo of Italy falling into recession.

(Bloomberg) —  Italy fell into recession at the end of 2018, capping a year of political turmoil, higher borrowing costs and fiscal tensions that took their toll on the economy.

Output contracted 0.2 percent in the three months through December, following a 0.1 percent fall in the previous quarter, statistics agency Istat said Thursday in Rome. The year-end shrinkage was greater than expected. 

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The data “reflect a marked worsening of the industrial sector’s performance, and of a negative contribution of agriculture,” Istat said in releasing the data. It said services’ activity “stagnated.”

Premier Giuseppe Conte said Wednesday that he expected the fourth-quarter shrinkage, speaking in Milan a day before the official announcement.

Investors have been warily watching Italian economic performance following weeks of negotiations with the European Union over the government’s budget that pushed up bond yields. The latest round of bad news is likely to test market confidence in the government’s expansive program for 2019.

The fourth-quarter contraction was greater than a median estimate in a Bloomberg survey of 28 analysts that called for a quarterly shrinkage of 0.1 percent. The economy expanded 0.1 from the same quarter of 2017, while the full-year growth totalled 0.8 percent on a work-day-adjusted basis. 

The December unemployment rate fell to 10.3 percent, Istat said earlier in the day.

In addition to output declining (resulting in a real GDP QoQ reading of -0.20%), total assets of Italian banks have been plummeting. On the bright side, bank nonperforming loan rates are falling (but are still quite high at 14.4%).

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All this despite the ECB’s Main Refinancing Operations Annoucement Rate of … 0%.

Italy’s sovereign yield curve remains steeply upward sloping with short rates negative (courtesy of the ECB). 10Y SR CDS for Italy is 242.8 (elevated risk).

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Italy shows the limits of central bank zero-interest rate policies. Perhaps ECB head Mario Draghi should sing “Mambo Italiano” instead of distorting economies and asset prices.

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IMF Downgrades Eurozone Growth To 1.6% (Global Forecast At 3-Year Low)

The International Monetary Fund (IMF) has downgraded economic growth for the Eurozone to 1.6 for 2019. weoupdatejan2019.  But Japan is even worse at a forecast of 1.1% for 2019.

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Russia is also forecast to be sub-2% as 1.6%.

The Eurozone and Japan are drunk as a skunk on global Central Bank zero interest rate policies.

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Why Interest Rates Are Not Likely To Rise Much In The Near Future (Ford Cutting Thousands Of European Jobs, China Car Sales Plunge 13% YoY, Etc.)

Since early November 2018 when the 10-year Tteasury note yield hit 3.24%, both the Treasury yield and 30 year mortgage rate (MBA) have plunged.

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Partly to blame is the slowing economies around the globe, particularly in Europe (check out Ford’s announcement of job cuts in Europe: Ford Motor Co. will shed thousands of jobs at its European operations as part of a bid to return the business to profitability with a broad restructuring that could include shuttering factories).

And then there is that 13% YoY decline in China Passenger Car Sales.

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So, despite global zero-interest policies (except for the US), global economies are slowing.

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It is difficult to push US interest rates higher when the global economy is slowing down.

To be sure, there are a whole host of wild cards that could send interest rates rising again: 1) US-China trade agreement, 2) ending the US government shutdown, 3) resolution of the neverending BREXIT issue, 4) France and Germany’s struggles to raise energy prices (Paris Accord?), etc.

The implied probability of a Fed rate hike in this global environment is pretty low.

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And both the US Treasury actives curve and Dollar Swap curve remain kinked.

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Will The Fed emulate Frank Booth from “Blue Velvet” and provide more oxygen to markets?

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