Deutsche Bank AT1 bonds slump to all-time lows, rest of the sector relatively resilient so far

The immediate cause of Deutsche Bank's current turmoil is a fine of up to $14 billion imposed by U.S. Department of Justice over its sale of mortgage-backed securities, which Deutsche is disputing. Chief Executive John Cryan on Friday said in a letter that uncertainty over the outcome of the case was no reason for Deutsche Bank's share to be under pressure, given the eventually lower settlements of similar cases by Deutsche Bank's competitors.

Deutsche Bank bonds have been under intense pressure since mid-September when the fine for mis-selling mortgage securities in the US first emerged. Deutsche Bank Additional Tier 1 securities slumped to their lowest ever level on Friday after reports some of its hedge fund clients were reducing their financial exposure.

Deutsche's €1.75bn 2022 6 percent AT1 bond was bid at 69.55 on Friday morning, below its low of 70.2 at the height of February's savage sell-off. The US$1.25bn 6.25 percent 2020 AT1 is bid at 69.8, also an all-time low. Both notes have fallen around 14 points since September 9.

Tier 2 bonds which constitute the less risk forms of Deutsche Bank's debt capital structure have also been severely hit. The €750m 4.5 percent 2026 Tier 2 bond, where the bank cannot skip coupons, has widened by 37bp to 535bp since Thursday, according to Tradeweb. A 1.125 percent March 2025 senior bond has gapped 46bp wider, to swaps plus 229bp.

The bank's five-year credit default swaps, which reflect the cost of insuring against a bond defaulting, jumped by 21bp on Friday to 255bp on escalating market fears.

In February Deutsche Bank's AT1s led the whole AT1 market lower. But this time around, the rest of the sector has proved relatively resilient so far.