Deutsche Bank Spurs Volatile Session

Treasurys rally but scale back gains throughout the afternoon. Swap rates and Treasury yields opened far below yesterday’s close after worries of banking instability struck again, with Deutsche Bank in the spotlight. The 2-year yield dipped as low as 3.55% in the morning but spiked back up to 3.76% shortly thereafter and stayed neutral throughout the remainder of the session. The 10-year yield also fell significantly in the morning, plummeting to 3.28% before rising to 3.38%, declining just over 5bps on the day. Equities rose slightly, with the DOW, NASDAQ, and S&P 500 gaining 0.3% – 0.6% in the session.

Deutsche Bank stock suffers on spike in default insurance costs. Shares of Deutsche Bank closed 8.6% lower today following an increase in the cost of its credit default swaps from 142bps yesterday to 173bps, indicating that markets see higher default risk at the bank. Many analysts see this as a reaction to the issues facing Credit Suisse and note that the bank has restructured and has been profitable for 10 straight quarters. The bank’s tier 1 capital instruments also saw a sharp selloff following the $17 billion write-down of Credit Suisse’s own tier 1 capital as part of a rescue deal, a controversial move. The bank announced an early redemption of $1.5 billion in tier 2 bonds to shore up confidence among bond investors that the bank can continue to meet its obligations, but the move has not had a material impact on the bank’s stock price or CDS spread.

Week ahead. Fed voters Philip Jefferson, Christopher Waller, John Williams, and Lisa Cook are set to make public comments next week. Separately, Fed voter Michael Barr will have a two-day testimony that begins on Tuesday. Data releases will be sparse, with Friday’s PCE, personal income, and personal spending data the highlights.